Research Summary Description: A critical analysis of contemporary economics issues informed by economic theory and appropriate supporting evidence.
Introduction:
Smoking has been recognised as the biggest cause of disease and death that can be prevented in Australia. It has been identified that extensive smoking can lead to various diseases like asthma, bronchitis, emphysema, cancer, stroke and heart disease. There is very powerfully addictive nicotine in tobacco that makes smoking a long-term and a regular habit and thus it is not easy to quit. Thus it is one of the matters of concerns for an economy and various measures must be taken to reduce the smoking consumption.
Overview of the issue:
Smoking is one of the pressing issues in Australia today as it can have significant impact on the health of people. It is evident that smoking is the single preventable cause of diseases and death. Smoking leads to various diseases that can be life threatening. It is also very difficult to quit smoking due to the nicotine in tobacco. Thus it is the responsibility of the government that they take appropriate measures to reduce the smoking consumption in Australia. It can be said that smoking is a problem that is faced by the society (Tobaccoinaustralia.org.au, 2014).
Smoking does not only have significant impact on the health of the smokers but it also affects the health of people around and it increases environmental pollution. At present male smokers are 20.4% and the female smokers are 16.3% in Australia. It is claimed by the government that they had to bear a cost of $31.5 billion in terms of smoking. The cost measure includes the cost for reduction of smoking and the cost that incurred due to smoking. Thus the government has taken initiatives and implemented the National Tobacco strategy 2012-2018.
According to the policy framework various measures will be taken to reduce the smoking consumption in the economy like regulation of the production of tobacco, alternative nicotine delivery system, regulations in terms of supply and availability of tobacco, provide legislations for smoke-free public places, provision of evidence-based cessation to support smokers to quit, elimination of sponsorship, promotion and advertisement of tobacco products etc (Tobaccoinaustralia.org.au, 2014).
Economic model:
It is evident that tobacco consumption or smoking imposes various costs on the government and thus it is very important that the government takes certain measures to reduce the incidence of smoking. There are different strategies that can be implemented by the government for the reduction of smoking in the country.
One such measure that can be implemented by the government is the imposition of tax on the tobacco consumption. It can be said that there are various costs that are borne by the government for the consumption of smoking thus imposition of tax is one of the effective measures for tackling this economic problem (Tobaccocontrol.bmj.com, 2014).
Here it can be said that smoking is a form of negative externality that increases the social cost. Thus the model of externality can be used here in order to present the economic analysis of the taxation of smoking. It is known in the presence of negative externality the marginal private cost is lesser than the marginal social cost.
The difference between the marginal social cost and the marginal private cost can indicate the externality cost. Thus the externality cost can be compensated by imposing the tax on the smoking (Oxygen, 2014). It is evident that in the presence of externality there can be market failure in the economy and thus it is very important that government imposes tax on smoking. The market failure occurs when there is over-supply of cigarette; it also leads to bad for the society and people.
Thus the consumption and the production cause negative eternality in the economy. Here the external cost is realised in terms of health issues of the public and air pollution in general. Thus private cost to the producers or the consumers is lower than the cost to the society. In the following diagram the costs and benefits and the externality can be shown.
In the above diagram, it can be seen that, in the presence of externality the marginal social cost curve (MSC), lies above the marginal private cost curve (MPC). The measure of externality can be shown from the difference between the MSC and MPC curves. Thus the tax can be imposed in this case for achieving efficient outcome in the society (Organization and others, 2003).
When there is negative externality in the economy, the tax can internalise some of the externalities in the economy. Here it is seen that at the level of output Q1, the marginal private benefit equals marginal private cost. Here the price of the product is at P1. The equilibrium is not socially efficient. It is known that the socially efficient outcome is received when the private social benefit is equal to the marginal private cost. Thus the efficient output is Q2 and the price is P2 (Ncbi.nlm.nih.gov, 2014).
Critical analysis:
Tobacco taxation is a complex topic. The complexity is basically seen due to the varieties of taxes that are imposed on the tobacco. Here it can be said that the effect of excise taxes on the demand of cigarettes can be reflected on the responsiveness of the demand for cigarette and the price of cigarettes. Thus these factors must be considered while implementing the tax on tobacco.
When the price elasticity of demand for tobacco is higher in an economy, then an increase in price will significantly reduce the smoking and tobacco consumption. On the other hand when the price elasticity of demand is inelastic, then the increase in price will not lower the demand for the product. Thus it can be said that the impact of tax will not be effective when there exist inelastic demand for the product in the economy (NATIONAL TOBACCO STRATEGY 2012–2018, 2012).
But it can be asserted that the imposition of tax on tobacco has been effective in most of the economies. On 1st August 2013, it was announced by the Australian government that the tax on tobacco will increase by 12.5 percent and the tax will continuously increase in the next four years. It has been evident from the studies on different countries including Australia proved that an increase in the taxes reduces smoking (Health.gov.au, 2014).
When the tax on smoking increases, the people intend to quit smoking and they also seek help in this regards. People from lower socio-economic groups have more affinity towards quitting the smoking. In Australia the government has continuously increased the tax on smoking and that led to a fall in the smoking. The smoking for males has reduced from 27.2% in 2001 to 20.4% in 2011-12. The smoking in females has also reduced from 21.2% in 2001 to 16.3% in 2011-12. It can be shown in the following graph (HubPages, 2014).
Source: (Abs.gov.au, 2014)
In the following diagram the evidence from US is presented that shows and increase in taxes significantly reduces the consumption (Health.gov.au, 2014).
Source: (Cigarette Tax Increase Tool Kit, 2014)
The revenue that is raised in taxation can be used for other preventive measures as well. Here the government can use the revenue for advertisement and promotion purpose in order to make everyone aware of the ill effects of smoking. This can effectively reduce smoking in an economy.
Conclusion:
In conclusion it can be said that, smoking is one of the pressing issues in every economy and thus various effective measures must be taken by the government in controlling the smoking. It is seen in the assignment how tax on smoking can be effective measures in reducing smoking. There can be certain limitations in terms of inelastic demand but with various programs and advertisements combined with taxation can effectively reduce smoking.
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