Mayor Ram Emanuel's Plan To Increase Cigarette Tax Proposal

This article is about Chicago Mayor Rahm Emanuel’s plan to increase the cigarette tax in order to discourage people from smoking and spend the revenue towards expanding a vision and eye-care program. He also plans to invest more heavily in after-school and summer job programs for at-risk youth. Governments often raise its cigarette taxes as it increases the government revenue while reducing the consumption of demerit goods. A demerit good is a good or service whose consumption is considered unhealthy, wrong and socially harmful due to their negative effects on the society as a whole. In other words, the consumption of cigarettes cause negative externalities of consumption. A negative externality of consumption is a cost to a third party not

Market failures occur due to many reasons such as over-supply and over-consumption of demerit goods and existence of externalities. In other words a market failure occurs when there is over-supply and over-consumption of cigarettes. Moreover, production and consumption of cigarettes causes negative externalities such as air pollution and non-smokers suffer health issues from the secondhand smoke, which causes an external cost. Due to the negative externalities of consumption, the marginal private benefit is greater than the marginal social benefit. The arrow shows the difference between the marginal private benefit and the marginal social benefit where the negative externality occurs. The most favourable level of consumption is where the marginal social benefit is equal to the marginal social cost. Since marginal social cost (MSC), comprising the cost of production plus the cost to society due to the negative externality, is greater than marginal social benefit (MSB), there will be a welfare loss. That’s where the market failure takes place. In figure 2, imposing indirect taxes will shift the MSC curve upwards to MSC + T

Also, if producers put the entire tax burden on the consumers through higher prices, it’s most likely to decrease the living standards of regular cigarette smokers. In addition to that Chicago’s high cigarette tax rate of $7.42 per pack may lead to the emergence of the parallel market. Over the time, too high tax rates may cause people to look for cheaper cigarettes. Some parallel markets arise because consumers don’t want to pay high taxes on the transaction for basic goods and services. Furthermore, that would be a good opportunity for smugglers to smuggle cigarettes into Chicago from the other states where the cigarette tax rate is lower. Nevertheless, increasing cigarette tax rate may lead to significant reduction in the use of cigarettes and make it less affordable for the people who have lower income. However as mentioned previously, consumers may be unresponsive to the price changes and still buy cigarettes despite the high prices because cigarettes are habit-forming