According
to Bangkok post online news, published on 22nd of August, 2012, government
has raised taxes on alcohol and cigarettes. Almost everything in the market we
buy or earn is taxed. Tax incidence is the division of the burden of a tax
between buyers and sellers. The way to calculate how much taxes must be paid is
using accounting profit. Normally, government impose taxes on cigarettes to
make the prices higher is to reduce the consumption. According to Bangkok post
economy news, the tax hike would decrease the total revenue per year. When
government imposes a tax on the sale of good, the price paid by buyers might
rise by the full amount of tax, by lesser amount than the tax, or not at all.
If the price paid by buyers rises by the full amount of tax, then the burden of
the tax falls entirely on buyers. Buyers bear the tax. If the price paid by
buyers rises by a lesser amount than the tax, then the burden of the tax falls
partly by buyers and partly by sellers. Lastly, if the price paid by buyers
does not change at all, then the burden of the tax falls entirely on sellers.
Sellers bear the tax.
A
price floor is a regulation that makes it illegal to trade at a price lower
than specified level. If the price floor is set below the equilibrium level, it
has no effect. The market works as if there were no price floor. If the price
floor is set above the equilibrium level, if has a powerful effect. For
instance, price floor must apply to the trading of cigarettes as it can reduce
the consumption of cigarette that will affect consumers’ health. Moreover, if
the price floor is set below the equilibrium level, the quantity of cigarette
demanded will exceed quantity of cigarette supplied. Therefore, shortage may
occur. This is what human being will do. People will purchase more even though
the goods are not what they wanted due to the drop of prices. One of the main
factors that change demand stated that if the expected future price of a good
rises, current demand for the good will increases and vice versa.
The
division of the tax between buyers and sellers depends in part on the
elasticity of demand. There are two cases which are perfectly inelastic demand
and perfectly elastic demand. Elastic means consumers are very responsive to
the changes of the price. Inelastic means consumers are not that responsive to
the changes of the price. For example, tax is imposed to cigarettes which make
the prices of cigarette go higher. Smokers are inelastic people. Smokers will
still buy even though government increases the price of cigarette or impose a
high tax on cigarette. This is reflected to perfectly inelastic demand. Demand
is perfectly inelastic regardless of the price. Smokers will sacrifice all
other goods and services rather than not consume cigarettes.
In the market of cigarette,
demand is perfectly inelastic. With no tax, the price of cigarette is RM 9.70 a
pack and the quantity demand in a day is 1000. A tax of RM 0.30 a pack shifts
the supply curve to S + tax. The price of cigarette raises to RM10 a pack, but
the quantity does not change at all. Therefore, buyers pay the entire tax.
According to the Star news, the
impact of the hike could be significant as any price above RM10 could be a
psychological deterrent and may trigger smokers to seek cheaper substitutes.
The report also stated that cigarette prices could lead to ‘down trading’ from
higher proportion of premium smokers to value-for-money (VFM) brands and from
VFM brands to illicit cigarettes. Here comes a black market. A black market is
an illegal market that operates alongside a legal market in which a price floor
or other restriction has been imposed. As the price of cigarette increase,
black market will occur. Illegal arrangements are made between sellers and
buyers at price below the price floor. In
this case, authorities really need to buck up and book those irresponsible
retailers who doing illegal sales of cigarette, who obviously have no qualms
about breaking the law to earn some extra profit. They are not afraid simply
because the penalties in place are not strong enough to stop them from dealing
in these illegal cigarettes. If nothing is done to this matter, situation would
escalate further to the point where such criminal activities would become the
norm.
In
the market of cigarette, demand is perfectly inelastic. With no tax, the price
of cigarette is RM 9.70 a pack and the quantity demand in a day is 1000. A tax
of RM 0.30 a pack shifts the supply curve to S + tax. The price of cigarette
raises to RM10 a pack, but the quantity does not change at all. Therefore,
buyers pay the entire tax.
According to the Star news, the
impact of the hike could be significant as any price above RM10 could be a
psychological deterrent and may trigger smokers to seek cheaper substitutes.
The report also stated that cigarette prices could lead to ‘down trading’ from
higher proportion of premium smokers to value-for-money (VFM) brands and from
VFM brands to illicit cigarettes. Here comes a black market. A black market is
an illegal market that operates alongside a legal market in which a price floor
or other restriction has been imposed. As the price of cigarette increase,
black market will occur. Illegal arrangements are made between sellers and
buyers at price below the price floor. In
this case, authorities really need to buck up and book those irresponsible
retailers who doing illegal sales of cigarette, who obviously have no qualms
about breaking the law to earn some extra profit. They are not afraid simply
because the penalties in place are not strong enough to stop them from dealing
in these illegal cigarettes. If nothing is done to this matter, situation would
escalate further to the point where such criminal activities would become the
norm.
On the other hand, markets do not always achieve an efficient outcome. Market failure arises when a market delivers in inefficient outcome. Market failure can occur because too little of an item is produced or too much of an item is produced.
The figure above is
underproduction. The grey region is deadweight loss. It is inefficient because
the production could not fulfill what is wanted by public. Underproduction is a
market failure.
The
figure above is overproduction. The grey region is deadweight loss. Wasting of
resources occurs there. Companies producing more than what should produce.
With
no tax, marginal social benefit equals marginal social cost and the market is
efficient. The total of consumer surplus and producer surplus is maximized at
the equilibrium level. The tax decreases the quantity, raises the buyers’ price
and lowers the sellers’ price. While if marginal social benefit exceeds
marginal social cost and the tax is inefficient. Total of consumer surplus and
producer surplus is maximized at the equilibrium level. The tax decreases the
quantity, raises the buyers’ price and lowers the sellers’ price.
In
this instance, government should organize quit smoking campaigns to remind
people stop taking in too much of cigarette as cigarette affects people’s
health and will lead to many diseases and even death.
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