The Higher Tax On Cigarettes In Australia

Within the year of 2010, consumers of cigarettes were faced with higher prices as a tax increase of 25 per cent was put into effect by the Australian federal government. These figures, along with the other effects of the tax increase, were published in The Age article, ‘Price rise pushes puffers to patches’. The article comments and provides evidence to positive societal outcomes that have resulted from the government’s tax hike, where it outlines the increase in demand of products used to help consumers say ‘no’ to cigarettes. As the article has mentioned an increase in demand of cigarette substitutes, it is evident that the tax increase on cigarettes would have, and continue to have an effect on the market outcome.

In order to recognise

The market outcome of a product relies heavily on the concept of supply and demand; where supply is the quantity supplied at a certain price and demand is the quantity demanded at a certain price (Price Theory, n.d.). Simplistically, the law of supply and demand in the case of cigarettes may prove along with real life statistics, that an increase in its price will decrease in the quantity of the cigarettes demanded. Such statistics are evident in a study conducted by Craig Gallet and John List in 2003, where it was found that a 10% increase in the price of tobacco and cigarette products would decrease the consumption of such products by 4.8% (13.1 Price elasticity of demand for tobacco products, n.d.). However, the tax increase will affect substantially more than simply a decrease in cigarette sales, as due to the lessening interest in the purchase of cigarettes, there then becomes less interest in the supplying of cigarettes. This lack of interest will force suppliers to leave the market and potential suppliers to become discouraged and not enter the market at all; therefore the tax increase on cigarettes has the potential to shut down the market completely. Along with the factors aforementioned, another factor that has the ability to effect the amount of influence that a tax increase on a certain product has, is price elasticity of

Price elasticity of demand refers to the relationship between both the price and quantity of a product that is demanded and the elasticity of demand can either be classified as, simply, inelastic or elastic. If a demand curve is regarded as inelastic, consumers in the market for such a product are relatively unresponsive to changes in price; therefore, the quantity demanded will remain constant regardless of whether the price falls or the price rises. Although, if a demand curve is regarded as elastic, this understanding of inelastic elasticity can be reversed to where consumers are greatly or more responsive to changes in price (Price Elasticity of Demand, 2015). In the short term, the price elasticity of demand for cigarettes can be regarded as relatively inelastic despite the increase in the price of cigarettes. Reasoning for this takes into consideration the amount of time consumers of cigarettes take to quit smoking and therefore the amount of cigarettes demanded will not decrease significantly. However, as more and more consumers of cigarettes break the habit of smoking and eventually quit, the price elasticity of demand in the long term will gradually become more elastic; therefore the quantity of cigarettes demanded will lessen. As