In the past, people can buy cigarette and smoke almost everywhere, even in the hospital. Cigarette advertisement is everywhere as well. And now, people is aware that smoking might leads our health into risk and the disadvantages of smoking. So advertisement of cigarette and strictly banned and smoking is restricted in many places public places. In today’s world, everyone knows the bad side of smoking. It causes lung cancer, breathing difficulties, heart disease and many more. Besides that, smoking can shorten your life by 10 years or more. Tobacco contains nicotine, something that is highly addictive. People smoke is due to few reasons, some of them think they are cool, some of them smoke is because of their friends or parents. . Addiction, is the main killer which makes people continue lighting up their cigarettes. Once you are addicted to smoking as a habit, it is very hard for you to stop. That is why it is better for you not to start smoking at all.
Theories of demand of cigarette is based on addiction. Many economist theorized that the use of tobacco is not appropriate for predictable economic analysis. Myopic addiction model assumes heavy smoker is shortsighted and theorists predict that factors like price and income, will affect the demand of cigarette. The income elasticity of demand measures how the quantity demanded of a good responds to change in income, other thing is still remain the same. Individuals tend to ignore or discount the future costs including monetary and health-related. They state that, while the decline in prices will increase consumption and prices rise, will reduce consumption, the impact of price rises will be far less than the impact of any price decline. Some people quite smoking is due to financial pressure, and some of them is because they value their health. Different people have different kind of perspective.
The estimates of elasticity. The price elasticity of demand is a unit free measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buying plans remain the same. There is a certain extent on the demand of the particular goods, respond by changing its price. Reduce the consumption of tobacco products, according to the size of the price increases, the increase in tobacco tax is considerable. In 1999, the World Bank review concluded that, all other things being equal, prices rose about 10%, with an average reduction of tobacco consumption in the developed countries of about 4% and 8% in the development countries.9 its recent $ 10 -86 published research reports, analysis and review of the study of the price elasticity of demand for tobacco products in 2001, Calais and List11, found that the average price elasticity of -0.48, which means that, on average, 10% of the prices subsequently reduced to 4.8% of consumption. Later studies found similar flexibility.
Calculating price elasticity of demand
Percentage change in quantity demanded
Percentage change in space
Government applies tax on cigarette due to the market failure. In competitive markets, underproduction or overproduction arise when there are price and quantity regulations, government will set price ceiling and price floor to the certain good. Taxes and subsidies, externalities, like penalty on externalities when market is inefficient. Public goods and common resources, monopoly and high transaction cost. There is a strong proof that adding the price can decrease the demand of tobacco products. Increasing tobacco tax is the best way to decrease the demand among the youngsters. There are two types of taxes, tax incidence and tax on sellers. Tax incidence is the division of the burden of tax between buyers and sellers. If the price rises by the full amount of the tax, buyers pay the tax. Next is the price rises by lesser amount than the tax, buyers and sellers share the burden of the tax. There is a tax on sellers.
In year 1988 California voters overwhelmingly support 99 Proposition California Tobacco Tax and Health Promotion Act, to increase the state cigarette tax by 25 cents per pack, and specify the health and education projects, including a statewide20% of the tax revenue with new media campaign to reduce smoking. Legislative impact assessment tax increase in cigarette sales of more than 27 packages per person consumption decreased, while sales revenue fell by less than eight groups per person because of the media campaign flexibility. The division of the tax between buyers and sellers depends on the elasticity of demand and supply. Perfectly inelastic demand is buyers pay the entire tax, perfectly elastic demand is sellers pay the entire tax while the more the demand, the larger is the buyers’ share of the tax.
All in all, it is good that the government has increase the price of cigarette so that they will be less people who buy cigarettes. This shows that the government cares the health of the people. They are unable to raise the price too high due to the price ceiling. Price ceiling can be called as price cap. Price ceiling is a regulation that makes it illegal to charge a price higher than a specified level. This will lead to decrease in smoking but not stop completely. As tobacco is playing an important role in certain country economy. This will cause the economy to decrease because the government has raised the tax of the tobacco.
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