microeconomic essay

Discuss three policies to reduce the level of cigarette smoking amongst under 21s.

Smoking is an example of a negative externality (a negative effect on a third party) as it leads to health problems, lower life expectancy and pollution, which therefore affect the whole society (even non-smokers, for example, through passive smoking). Social cost of smoking exceeds private cost (social cost is estimated to be around $200 for a pack of cigarettes, while a pack costs $8), so we can conclude that smoking is an example of market failure. Thus, it may be corrected by government intervention.

In this essay I am going to talk about policies to reduce youth smoking (35% of 16-21-year-olds) particularly.
I would say that there are two types of policies to reduce the level of youth smoking: providing incentives not to smoke and banning/increasing the private cost of smoking. These policies, however, can be used together.

First of all, government may increase cigarette tax and the expected effect of this is shown on the diagram below:


Price goes up from P1 to P2, quantity reduces from Q1 to Q2, over-consumption seems to be reduced.


The problem with this policy is the fact that the demand for tobacco products is price inelastic: estimated elasticity is -0.5.
( source: 'The Demand for Tobacco Products in the UK by Paul Cullum' )

That means that people will continue the over-consumption of tobacco products in spite of tax burden (which accounts for 90% of the price of cigarettes in the UK).

Moreover, putting tax on cigarettes is not sufficient: in order to be effective in correcting market failure arising from tobacco consumption government should tax all tobacco products.

This tax will also produce inequality: low income people will be taxed for larger percentage of their income comparing to middle and high income people. - - -> government failure

Too high tax may also produce black market for cigarettes - -- > government failure

The last problem with this policy I can think of is the fact that it is difficult to calculate the right amount of tax: if tax is too high, government tax revenue can actually decrease as few people will continue to consume cigarettes for that price. - - -> government failure.

Second policy is correcting information failure: providing young people with right information about tobacco products, advertising.
This method seems to be effective as it shifts the demand for cigarettes to the right, but in order to reduce assymetric information, tobacco companies' advertising should be banned.

And the third policy to reduce youth smoking is subsidising tobacco substitutes such as anti-smoking patches, anti-smoking gum or electronic cigarettes (safety of these cigarettes is argueable though).


Subsidy decreases the price for safe tobacco substitutes from P1 to P2 and inreases the quantity sold, which means less tobacco products are consumed.

However, this policy is going to be effective only in combination with the second one as young people are unlikely to consider any products as substitutes for tobacco, because of the information failure.


Eventually, the last problem which arises from all of these policies is tobacco companies losses: if policies are effective, people will stop the consumption of tobacco and tobacco companies will have to decrease their output. Demand for labour is a derived demand for product, therefore as the demand for cigarettes falls, unemployment may rise. - - - > government failure.

sources:
http://www.the-tma.org.uk/tobacco-smuggling.aspx
http://www.ic.nhs.uk/webfiles/publications/smokingeng2006/Smoking%20bulletin%202006%20-%20Finalv3.pdf