Tobacco Tax Hike Prompts Many To Quit Economics Essay
AUSTRALIA’S tobacco tax hike had a dramatic and immediate impact on the nation’s smokers, with almost 300,000 stubbing out for good.
Polling since the move, in late April, to increase tobacco taxes by 25 per cent shows a significant jump in the number of smokers attempting to quit and how many of them were successful.
The research also confirms the cost of cigarettes as a powerful lever for improving public health, with only 16 per cent of smokers stating they would “continue to smoke at any price”.
“The new tariff drew strong reactions and much debate from smokers, anti-smoking groups and smoking cessation experts from across Australia when it took effect at midnight on April 29 this year,” said smoking cessation expert Associate Professor John Litt from Flinders University.
“From this research it appears this move was the right one when it comes to trying to reduce smoking levels.”
Two polls were conducted by Galaxy Research – one involving a thousand smokers and non-smokers plus and another targeting 1200 occasional to regular smokers.
Extrapolating these results across the country, the polling showed there were more than 3.1 million smokers before the tax increase.
In the two months following the price hike, 1.2 million smokers (38 per cent of all smokers) made a quit attempt.
Just short of 300,000 of these (nine per cent of all smokers) rated their quit attempt as a success.
Quit attempts were significantly up from the 29 per cent of smokers who tried to do so in the three months before the tax hike.
The rising cost of cigarettes was nominated as the number one reason for giving up by 21 per cent of those who successfully quit, while 45 per cent nominated health concerns.
And of the majority who continued to smoke, 29 per cent said they were smoking fewer cigarettes, 47 per cent considered quitting and 40 per cent said they intended to quit in the future.
Dr Litt said it was not a negative that so many smokers thought about quitting but had not yet done so.
“I would argue that a quit attempt is a good start as we know it can take many quit attempt before a smoker is successful in giving up for good,” he said.
“… People should visit their doctor for advice on what treatment options are available to help break the addiction.”
The polling also found the average smoker was now spending $57 a week on cigarettes, up from $51 before the price increase.
More than half (52 per cent) of smokers said they would try to quit of the price of 20 cigarettes reached $20. At $25, 68 per cent would try to quit while only 16 per cent would “continue to smoke at any price”.
The tax hike, which was brought forward a day after news of it sparked a rush on tobacconists, increased the price of a pack of 30 cigarettes by $2.16 to about $15.
In a further initiative, the federal government will enforce new regulations banning the use of colour and attractive text on cigarette packets from July 2012.
The polling was commissioned by Pfizer Australia, which makes smoking cessation treatments.
Commentary Number 2
Tobacco tax hike prompts many to quit
9% of all smokers stopped smoking, even though 45% of those (who stopped smoking) stopped smoking because of health concerns. This is calculated by:
PED, price elasticity of demand is a measure of how much the quantity demanded of a product changes when there is a change in the price of the product. Quantity demanded has decreased by 300,000 people who stopped smoking from an original demand of 3100,000, which is a change of –9%. The price has increased by 25% that affected by taxes. Therefore, the PED would be – 0.36%.
PED must be negative because of the inverse relationship of the law of demand, and economists usually ignored the negative values to simplify matters, so gives the value as a positive. Therefore, it would be 0.36%. The value of PED is less than one and greater than zero, thus, the tobacco has quite inelastic demand, then an increasing in the tobacco leads to a decreasing in the quantity demanded but it would not fall by much in comparison, as this article mentioned, “many smokers thought about quitting but had not yet done so.”
Price / pack ($)
12.84
Millions (packs)
15
S + tax
Figure.1 The effect on a supply curve of a percentage tax
25%
Q
0
An indirect tax is imposed upon expenditure. It is placed upon the selling price of a product, so it raises the firm’ costs and shifts the supply curve vertically upwards by the amount of the tax. In this case, tobacco taxes increased by 25%, thus the tax on the tobacco was $15 that increased by $2.16. The price of the tobacco would be $12.84 before the tax hike. This is a percentage tax, where the tax is a percentage of the selling price and so the supply curve will shift. The gap between and S+tax will get bigger as the price of the tobacco rises.
12.84
Millions (packs)
15
Figure.2 Effect of an expenditure tax on demand curve
3.1
2.8
Government tax revenue
0
S + tax
Price / pack ($)Since governments impose taxes on tobacco, it is the same as raising the price, which means a movement along the demand curve, and thus a shift in the supply curve.
S + tax
Price / pack ($)
Millions (packs)
3.1
2.8
15
12.84
25%
0
Figure.3 The imposition of a percentage tax on the tobacco
X
W
Y
Producer revenue before tax is imposed
+
Producer revenue after tax is imposed The original price of tobacco is $12.84, and the original quantity demanded is 3.1millions units. The inelastic demand for tobacco results in a fall in quantity demanded of 9% and a rise in price of 25%. As the government will get $2.16 per pack since now the tax on the product is $15, total tax revenue is $2.16 times 2.8 millions packs, which is about 6 millions dollars.
The market is in equilibrium, with 3.1 millions supplied and demanded at a price of . When the tax is imposed, the supply curve shifts vertically upwards to S+tax. The producers would like to raise the price to and so pass on all of the cost of the tax to the consumers. However, there is an excess supply at that price, so price has to fall until a new equilibrium is reached. The price of the product for the consumers rises from to $15, which is their share of the tax, and is about whole tax of XY. After paying the tax of XY to the government, producers now receive $12.84 per unit, so revenue for producers decreased. Government receives tax revenue as shown in the figure2.
The reason for government imposed indirect taxes is to reduce consumption. Since there is negative externality of consumption, there is a welfare loss and misallocation of society’s resources of the extra unit from Qs to Qp, because MSC is grater than MSB. Imposition of indirect tax will reduce consumption to the socially efficient level of output Qs, but the price to the consumer will be higher than market price. However, tax do not managed to reduce quantity demanded very much and so, while government revenues is raised, quantity demanded does not fall to the socially efficient level. In long term, if taxes are raised too much, then people start to look for other sources of supply. Therefore, there would be emergence of black market.
Quantity of tobacco
Qs
Qp
Pp
Ps
MSC
MSB
MPB
Figure.5 Measures to reduce negative externality of consumption
Pt
Quantity of tobacco
Price / pack ($)
Qs
Qp
Pp
Ps
MSC
MSB
MPB
Welfare loss
Negative externality
Figure.4 A negative externality of consumption
MSC + tax
Price / pack ($)
Normally government impose indirect taxes on products where demand is relatively inelastic, therefore the demand for the tobacco will not fall by a significant amount, so will not have high unemployment in the economy. Therefore, in short term, there would be not much effect on imposed taxes. In long tern, if the price of tobacco keeps increase, the quantity demanded will decrease as people will attempt to quick. This affect to the tobacco firms to decrease quantity of tobacco, so there will be higher level of unemployment, but external cost will decrease, which is benefit to health service.
