The article discusses the possible implications of a tax on cigarettes by the Chinese government in order to curb the rate of smoking in the country. It highlights the alarming rate of smoking amongst Chinese population. It also discusses the high dependence of Chinese tobacco industry on cigarettes as well as government revenue from cigarette industry.
Adam Smith believed market forces would lead to efficient allocation of resources to maximize social welfare. However, this has not been the case with most economies and producers and consumers have not been taken into account the external costs and benefits that their decisions have on the third party. These negative effects are known as externalities.
The market often fails to achieve efficiency and social costs are not equal to social benefits. In China, an increase in smoking has been caused by a decrease in the costs of cigarettes, with smokers now being able to spend three-percent of their annual income on cigarettes as opposed to 14% only a decade ago. This has been caused by an increase in supply, as China produces 41% of the world’s cigarettes today.
Negative externalities, resulting from cigarette smoking such as lung cancer, asthma, and cancer related diseases impose high costs on the third party.
The article suggests that there are 300 million smokers in China, which is about a third of all the smokers in the world. With approximately 28% Chinese indulging in smoking, China has one of the highest number of smokers than any other modern economies (paragraph 3).
The government plays the parental role and internalize the externalities using several measures. A tax of 11% is simply one of the measures Chinese government has taken. Since PED for cigarette is relatively inelastic; PED<1, even a all time high tax will not deter Chinese people to cut down on their consumption drastically because PED<1 means that the % increase in price leads to a less than proportional fall in quantity demanded. On one hand, Chinese government enjoyed an increase in its revenue through taxation policy by 24% and was successful in discouraging some of the smokers, the relatively inelastic demand was helpful for the policy not to cause much unemployment in tobacco and cigarette industry either.
The policy of selective tax is vital in controlling market failure. According to economic theory, selective taxes excise are not good since they may destruct individual consumption choice and habit among services and goods in the market. Thus, selective tax excise prevents the efficient allocation of resources allowing China to use selective excise tax in reducing cigarette consumption.
For cigarette tax, determination is purely leaned on the high rate of consumption and negative effects it causes to passive smokers. Therefore, environmental organisations and labour legalisation puts in place sanctions factors on selling of cigarette, due environmental pollution and adverse effects of cigarette-smoking. Cigarette smoking is associated with imposing costs on other users, for example, excessive consumption of tobacco is not only harmful to the health status of the person smoking but also to the passive smoker.
From this discussion, if clear that externalities may cause market failure in the sense that market price of the commodity does not reflect cost of consumption to the addicted victim. Tax is one of the keys determine factor in influencing externalities. The presence of externalities, the marginal social cost, cannot equate marginal private cost. Therefore, consumers of cigarette may decide to smoke less, hence, socially insufficient.
The diagram demonstrates what happens when a cigarette tax is imposed. The supply curve shifts leftward, and demand for cigarettes decreases. Consumers and producers both bear some burden with the higher price, and the government gets a cut. Consumption is cut from the reduction in demand and supply, achieving the societal goal of reducing the dangerous behavior of smoking.
The short-term effect of market failure and tax to any state with its people are many. Foremost, the economy of the country goes down, as the number of smoking reduces thus little tax collection. Secondly, the economy of the addicted users is adversely affected as they adjust to a high price of cigarette because of abnormal taxation imposed.
The positive effects, in this case, include reduction of lung cancer in the country as the number of smokers might drastically go down. Similarly, the tax helps to regulate commodities that are of less value or harmful effect on the market. For instance, smoking is harmful to health, thus, high taxation by government helps to reduce it from the market.
- Guhl, Nils. An Economic Assessment of Proposed Cigarette Excise Tax Hikes in the State of West Virginia. Hamburg: Diploma Verlag GmbH, 2003. Print.
- Nordrum, Amy. China Raises Cigarette Tax To 11 Percent To Curb High Rate Of Smoking. International Business Times. 2015. Web. Retrieved, February 14, 2016, from http://www.ibtimes.com/china-raises-cigarette-tax-11-percent-curb-high-rate-smoking-1914303