Title of extract: Smokers stock up on cigarettes to avoid tax hike - Juneau braces for bar-restaurant ban to take effect Jan. 2 Source of extract: The Juneau Times/Associated Press Date of extract: December 30th, 2004 Word count: 735 words Date the commentary was written: December 10th, 2005 Section of the syllabus to which the commentary is related: Section 2 Candidate name: xxxxxxx Candidate number: xxxxxxxx This article considers attempts to reduce smoking. State and local politicians are attempting to do three things.Firstly, they are placing a local ban on people smoking in restaurant/bars in Juneau. This may well lead to a shift in the demand curves for both restaurant/bars and for ordinary bars. Tastes of smokers should change and they will leave restaurant/bars and move to bars where they can smoke.
This is shown below: Restaurant/bars Bars Price Price ($) D1 DS ($) D D1 S P1 P P P1 0 Q1 QNumber 0Q Q1Number of customersof customersThe hope of the politicians is that making smoking difficult for people will lead to a fall in the demand for cigarettes as some people may stop, or reduce, their smoking, and thus the demand curve for cigarettes will shift to the left. The second strategy is to increase the state tax on cigarettes. This is a specific indirect tax . The demand for cigarettes is relatively inelastic and the text gives circumstantial evidence for this: “.
. he didn’t know about the increase, but it wouldn’t affect his use of cigarettes. ” “Nobody’s quit smoking because of the smoking ban. The first effect of the tax may be panic buying, before the tax rise comes.
Thus, if hearsay is correct – “... customers are purchasing up to four times the amount of cigarettes they normally buy,” - there will be a fourfold increase in demand, at the old tax rate of $1 per pack, and a significant shift of the demand curve to the right. Although this may lead to high revenue in the short run for sellers, and the government, it will mean that there will be a long run dip in the cigarette market as consumers use their stockpiles.This will, however, return to normal after time and the demand curve should shift back.
It may well end up to the left of the original demand curve, if the tax and smoking bans have the effect of reducing the demand for cigarettes. The diagram below shows the effect of the tax rise on the market for cigarettes. The Market for Cigarettes in Alaska Price of Cigarettes ST2ST1 S ($) P2 P1 Tax = $1. 60 P Tax = $1 T T1 D 0 Q2 Q1 Q Quantity of Cigarettes The original tax of $1 led to an upward shift of the supply curve from S to ST1.This caused a rise in price to P1 and a subsequent fall in quantity demanded to Q1.
Thus government revenue will be Q1 x $1. The relative rise in price is greater than the fall in quantity demanded, showing that demand is indeed relatively inelastic. When the tax is increased by 60? , price rises to P2 and the quantity demanded falls to Q2. Government revenue will be Q2 x $1. 60. Tax revenue will increase, because of the relatively inelastic demand.
The overall effect of the tax increases is interesting. At the moment, the state gains $46 million p. . from the taxes, but 76% of this, $35 million, is given to education.
Since smoking-related illnesses cost $125 million p. a. , there is a shortfall of $114 million p. a. The initial tax rise will generate an extra $20 million, not nearly enough to cover the shortfall. Also, 9% of the extra revenue, $1.
8 million, is going to education, the third strategy to stop smoking. Even with the two subsequent increases, which could be estimated to bring in about $12 million on top, there will still be a serious shortfall of $83. 8 million.The state will attempt to educate people in order to stop them smoking, thus shifting the demand curve for cigarettes to the left.
This is, however, a difficult task, since the demand for cigarettes is especially difficult to alter, due to the habit-forming nature of the good. The government wish to stop people smoking because smoking is a demerit good . The article shows that real efforts are being made to reduce smoking, but the desired outcome is likely to be slow in being achieved. A total ban would seem like the obvious answer, but loss of tax revenue and the emergence of a black market may well be factors against this.