This article discusses the market failure condemned by smoking and the Hong Kong’s government’s goals to help ban cigarettes in the future by implementing higher taxes on cigarettes. Figure 1. Cigarette market in Hong Kong showing negative externalities of consumptionAn externality occurs when a third party who are not involved in the production or consumption of a product are affected. The externality of cigarettes generated through consumption are completely negative as people are affected rather than gaining something positive from it. Displayed on the graph, consumers will amplify their utility and consume at Q1, where the MSC equals to MPB, instead of the socially desirable level of Qe and where the MSB equals to the MSC. This issues a welfare loss to society. This therefore makes cigarettes a demerit good. Whilst consuming an item, if negative externalities are generated, it will suggest that the marginal social benefits are below the marginal private benefits. The consumers wouldn’t commonly consider the negative effects of consumption influencing third parties, they will simply think about the expenses or benefits to themselves, which is socially undesirable.Figure 2. The inelastic demand of cigarettes Inelastic demand is the idea that necessities tend to be inelastic as they are required to survive. However, cigarettes have become a form of necessity due to the addiction caused by cigarettes meaning they would be willing to pay higher prices no matter what. The shift on the supply curve from S1 to S2 shows how at the equilibrium point there are significant changes in price and however small changes in quantity. Smoking has an inelastic demand as smoking is not beneficial in anyway as mentioned previously. Easily raising the price by 10% may not cause the smoker to alter their habits at all but due to the motive of the government to keep increasing the tax overtime, the smoker may not be as persistent in purchasing the cigarettes for a long run then eventually motivates them to quit smoking. At the end of the day it’ll become ultimately price sensitive. Figure 3. Indirect tax of cigarettes As said in the article it is crucial and widely known by the tobacco sector about the effectiveness of tax in controlling the consumption of cigarettes and to help correct this externality, it’s mainly outlined in the article that the government intervenes but mainly through inputting tax at the beginning of this law regulation. As displayed on the diagram if the price doubled, the tax shifts the supply curve to the left leading to a higher price. Then the quantity demanded would decrease and in the long run will meet the social desirability level and reduce the negative externalities overtime. As the government increases a tax the suppliers tend to be able to pass the whole increase through to consumers. To evaluate, the main reason the government would want to impose tax is so they can achieve social efficiency. The situation described above will affect a number of stakeholders. On balance, a higher tax will most definitely impact the consumers negatively as this means it’s compulsory for them to pay more to obtain the same good as they did before. Meanwhile, tax would not be in the producers best interest either as they want to make profit off more people purchasing meaning higher revenue, due to tax people may not be as willing to purchase and this can impact the tobacco businesses greatly as well as the economy because these businesses are also responsible for employment and losing profit may cause the industry to terminate employees causing people to lose their jobs. Nonetheless, this taxation impacts the local community positively as it reduces the need for people to breathe in secondhand smoke meaning the cases of asthma and other lung diseases would be reduced accordingly as the healthcare costs for treating these diseases are extremely high. It also reduces the environmental issues due to smoking as it’s a pollutant for the air and our surroundings from littering and smoke emission. There are also other methods which may be more plausible for the government to use to help decrease the usage of cigarettes such as enforcing regulations of minimum age for smoking as it may be ineffective to limit the older generations from smoking as they’re already more addicted, therefore it’d be easier to control the younger population of smokers from smoking. Other ideas include negative advertising or educating the public, which the government is currently attempting. This would in return help achieve the market failure’s principles of allocative efficiency.


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