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The articles extract above is to observe the impact of tax imposed by
the government. Different microeconomic concepts are used to analyse these
articles. The main intention of government charge higher price
of cigarette is to cut down the quantity of smoker from being increases.
Cigarette is one of the negative externality as it could cause pollution.
Therefore, the objective of government is to impose tax on it. They plan to
reduce the number of smoker as cigarette not good for health. According to the World Bank Report (1999) it states that tobacco tax
should be charged up from 67% to 80% of dealer cost. This is because the Health
Ministry's 3rd National Health and Morbidity Survey (2006) announced that there
are 3million of smokers exist in Malaysia which comprised of 30.9% of boys ages
between 13-15 and 23.1% of adults
(Consumers
Association of Penang, n.d.). Increased tax will help to reduce
the percentage of people smoking. This could increase the
government revenue but the main reason of imposed tax is to reduce the
pollution and increase the health living of citizen.
The
inelastic demand curve in graph 1 above shows that the change in price leads to
a less than percentage change in quantity demanded. According to law of demand,
the price and quantity demanded has the inverse relationship while other
factors are remain unchanged. When the price of cigarette increases, the
quantity demanded will decreases. This is due to the willingness of smokers to
purchase decreases and they are unable to afford it. This will lead to decrease
in quantity demanded. However, supplier would be much happier to supply more
cigarettes in order to maximize profit. This has proven by law of supply as it
shows the positive relationship between price and quantity supplied while other
factors are remains unchanged. When the price of cigarette increases, the
quantity supplied will increases.
Furthermore,
income effect and substitute effect occurs when price of cigarette rises. When
the income of smoker remains the same while the price of cigarette continue to rise,
the smoker cannot afford the cigarette consumption as much as they previously
brought. So, they will purchase less and causes the quantity demanded of
cigarette falls. For those smokers who are hardly quit smoking, they will find
substitution for it where substitute effect sets in. The electronic cigarette
(e-cigarette) is a substitution of cigarette. It is a battery-powered device which filled with liquid nicotine in it. It has the
same smell of cigarette and it is less harmful compared to cigarette. It is
less harmful as it can help the smokers to kick the habit. Meanwhile, the
changes in the price of cigarette influenced the price of complementary goods
which is the lighter. The quantity supplied of lighter decreases in response to
the decreasing needs of cigarette in the market. This is because people will
not buy lighter if they have quitted smoking.
Price
elasticity of demand (PED) is to measure the elasticity of the quantity
demanded to a change in the good’s price. Cigarette is considered as inelastic
demand because the price of cigarette increases gradually but people still
continues purchasing cigarette. There are several ways that lead to
inelasticity of demand. Substitutability is one of it because if an item has
fewer substitutes, it tends to have less elastic demand. The substitution
mentioned above which is e-cigarette is not a good substitution for low income
earner since e-cigarette is much more expensive than cigarette. That is why
less people switch to e-cigarette. Besides, the habits of smokers are hardly to
quit since they have addicted to it. The smoker will undergo the physical
withdrawal symptoms while quit smoking such as sniveling, coughing, headache,
muscle cramp and etc. At the same time, they will get anxious, irritable and
depress easily for no reason (quicksmokingsupport, 2013). In fact, the smokers will
face a hardship during that time. Thereby, smokers need to have a strong willpower
in order to quit smoking effectively. These factors results the smokers tend to
have inelastic demand for cigarettes.
Price
floor occurs when the government set a price higher than market equilibrium.
The intention of government of setting price floor is to remove the habit of
smoking as it harms people’s health. From the graph 2, the minimum price of
cigarette that set above equilibrium price creates a surplus in market. This is
because the supply exceeds the demand. There will be a market failure where the
inefficient underproduction happened in market. Price floor will not have a big
variation to the quantity demanded as the cigarette is an inelastic product.
Tax incidence is the tax burden between producer and consumer. In my knowledge
of microeconomics, the consumer will pay the tax provided the product is
inelastic and vice versa. As the producer cannot charge the price lower than
minimum price, the consumer have to pay more for it. People with lower income
will seek for black market to get cheaper cigarette to satisfy their needs.
In
Malaysia, the minimum cigarette price in past few years is RM6.40 in cigarette
pack of 20s which is relatively low in an anti-smoking country. However, this
scenery has changed over the years. According to British
American Tobacco Malaysia (BAT Malaysia), the price of cigarette will increase
20sen and it has effectively on 22 October 2012. The point of P0 and
Q0 is the market equilibrium at 2011. After the government impose
tax on cigarette, the price of cigarette increases from P0 (RM10) to
P1 (RM10.20) per pack. It is not a movement in the supply graph as
the willingness of supplier to produce the cigarette decreases. This is due to
the increase in cost of production and eventually shifts the supply curve
leftwards. The cigarette is considered as necessity for a smoker thus the
change in price will not affect much on hardcore smoker. Smokers are willing to buy it regardless of
how much it cost them. However, some smokers will cut off smoking if they
cannot afford it. In other word, the imposing tax in cigarette increases the
household disposable income which further increases their burden.
The
orange box between P0 and P1 is represents as consumer
burden while purple box between P1 and P2 is represents
as producer burden. This shows that the consumer burden is greater than
producer burden. As the price increases, the producer will charge higher price
on customer so as to cover their cost of production. As a result, producer
burden has shifted to consumer burden. In short, the smoker paid the largest
tax rather than producer. The yellow triangle is indicating deadweight loss
which is the loss in society. The black market occurs brings deadweight loss to
the market. If the price is too high, smoker will search for party who sell
cheaper cigarette in black market. The ratio of cigarette sold on the black
market has increased from 15% to 36.6% from year of 2009 to 2011. Normally, the
black market could sell cigarette at cheaper price which is below the minimum
price of cigarette. According to Global Adult Tobacco Survey (GATS), smokers
tend to switch to the illegal cigarette as the amount of smokers in Malaysia
does not reduce. It shows that smokers still do not quit smoking. GATS further
explained that nowadays smoker spent too much on cigarette which around RM6 per
day or RM178.80 per month on average. When the orange box combines with purple
box, it is known as government revenue. In other word, government revenue
increases when tax increases.
Imposed
tax on cigarette doesn’t reach the
government’s goal but eventually cause the people even poorer. The high
cigarette tax could reduce the consumption of smokers with low income but
majority of smokers are likely to reduce in other expenditure to afford it.
Hence, the main reason of decreasing in number of smoker is due to the health
condition instead of high price of cigarette. In my opinion, the impose tax on
cigarette doesn’t work effectively to reduce the amount of smoker. It will
leads to negative effect to the society if the tax of cigarette imposed is too
high. For example, the society crime rate will increase, selling illegal
cigarette everywhere and etc. A reasonable price of cigarette will improve the
living standard and health condition of citizen. The research shows that the
majority of smokers are teenager rather than adult. In order to remove this
habit, the government should take into account that the reasons of people start
smoking at young age. This may due to the family problems or environment that they
have been grown up. Therefore, parents should pay attention to their kids and
be their role model by not to smoke. For government side, anti-smoking campaigns
can be carried out so that the people are aware of dangers of smoking. The
regulation of selling cigarette also should be enforced.
