California Democrats: Negative Externality Of Cigarettes

California Democrats major aim is to reduce the consumption of tobacco as it is a demerit good which is bring huge impacts on the economy and consumers. Thats why they would like to increase tax on more then 50%, from 87 cents per pack to 2.87$. As well as banning the use of the electronic cigarettes in public places, such as restaurants and parks, where tobacco smoking is already prohibited and chewing tobacco too. They also would like to increase the legal smoking age from 18 to 21. The tobacco tax is an indirect tax which increasing cost on pack of cigarettes.

The market of cigarettes is an example for market failure, its when a market fails to produce efficient outcomes, and in particular does not achieve allocative efficiency. As I mentioned

It’s called negative externality of consumption. If Californian Democrats will increase tax on cigarettes will shift the supply curve, MSC, upward by the exactly the same tax amount as it will raise the cost of production by that much. That will bring the market output Q1 closer to the social output Q2 where MSB = MSC, which makes social optimum. As PED for cigarette is inelastic only a significant amount of tax will bring the market output close to the social optimal level. So, cigarettes are over consumed by Q1 - Q2 units. The difference between MSB and MPB equals to the external costs - negative

First of all disadvantages. The disposable income of consumers will be reduce as the prices are higher, which will decrease consumers living standards. Second problem is income inequality, as most of consumers low income individuals and indirect tax is type of regressive tax which means a fixed amount of tax on expenditure. That means rich or poor you will pay the same amount of money for a pack of cigarets. Reduction of cigarette consumption is low due to the low PED in the short run. Taxes will also reduce producer revenue so that might face opposition as article mentions that in 2012 when government increased the tax by 1$ the tobacco interests spent 47.7 million dollars in opposition or unemployment will increase. As most of cigarets employers are manufacturing workers who have low skills which may not have skills to find another job. Government in need of votes and more likely would not give theirs votes to the government which increase price on cigarettes by putting tax on cigarettes. There is much less advantages then disadvantages. Most important advantage is that government will have higher revenue which they could invest into merit goods such as education or health. As well in the long run percentage of smokers, will decrease, since people will recognize that they are spending to much money on