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California Tobacco Commentary

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Commentary:
The state of California is Planning to add a $2 tax on tobacco in the upcoming months, in order to increase government revenue and decrease cigarette consumption amongst the Californian population. The smoking of tobacco and cigarettes has a negative externality of consumption. It is an econòmic activity which has negative effects and costs of a third party, the rest of society. The smoker can get diseases and will xreate expenses for the Health System, plus he may make other people get diseases if there is passive smokers around him. Markte failure is often acomplished thanks to de-merit goods such as tobacco: i.e goods that are bad for both the consumer and the society as a whole. On the following diagram we can see the demand …show more content…

A common way for governments to decrease these negative externalities and decrease walfare los is by imposin direct taxes, which is what California is Planning to do. These will be the effects:
Applying a tax to remove negative externalities of consumption

Cigarettes and tobaco are ineslatic products, i.e. they have a price elasticity of demand lower than 1. This means that quanitty doesn’t change much when there is a change in price, i.e. even if the price is heavily increased, quantity demanded will barely fall. Cigarettes are an inelàstic product as they are addicting, and even if the price is higher, consumers will still pay because they need to consume them. Therefore, taxing inelàstic products is a common practice amongst governments around the globe, as the tax revenue will greatly increase due to the small decrease in quantity demanded. Although in most countries healthcare is run by the government, in America it is mostly private, and the Insurance companies charge smokers more than the rest, and the poor will end up paying a higher price, making the income inequality of the country …show more content…

If prices are too high, not only consumers will buy less from the tobacco industries, but they may start finding for other sources of supply such as Black Markets, which horts even more the government as there is a higher risk when buying and there is no tax revenue for the government. This is probably the worst case scenario that could ocurr after a heavy taxation such as the one California is

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