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Tax On Cigarettes In Australia

749 Words3 Pages

Microeconomics IA – Cigarette taxation The article is about the increase of tax on cigarettes in Australia. Senator Leyonhjelm is interviewed and it can be seen that he is not happy about the excise hike. The article tells smokers to stop smoking and save themselves some extra money that they would normally put into their health insurance. Cigarettes are demerit goods which are goods or services that are considered bad, unhealthy and socially undesirable due to their negative externalities. Externalities can be either of production or consumption and positive or negative and it means that the action that is being taken affects a third party. In the case of this article regarding cigarettes, there are negative externalities of consumption as …show more content…

This is because cigarettes are addictive, at least in the short run and therefore are a demerit good. “A smoker’s dirty habit can really add up over the course of the year, and it’s just become even more expensive so now would be a great time to quit and potentially save yourself over $10,000 a year…”, this supports the claim that even though the process might get higher due to indirect taxation, the shift in demand will be fairly low due to the fact that people get addicted and money aspects cannot do much in the short run. With the 13% tax on cigarettes, the equilibrium price will shift upwards which mean that the consumer burden marred as orange in figure 1 is much larger than producer burden marked yellow in diagram …show more content…

However, due to the fact that cigarettes are a demerit good and negative externalities are present, the MPB is going to be greater than the MSB. This is because cigarettes have a negative effect on the society and third parties involved through means such as smoke. Looking at the fact that the MPB is higher than MSB we can see that consumers are more preoccupied with their own private benefit rather than the society. The free market equilibrium will shift to P1 and Q1. As the MPB is greater than the MSB there is going to be a welfare loss which is labeled as the purple triangle and in order to get rid of the deadweight, the Australian government imposed an indirect tax of 13% on cigarettes which would shift the MPC up. By doing this the government hopes to cancel out the welfare loss which can be seen as the blue triangle on the graph. If everything was to go perfectly with the taxation, the ideal situation would be that the quantity of cigarettes decreases and goes back to the quantity of the social optimum (A) and there would be a new equilibrium price at

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