Q. Evaluate the economic case for and against the UK govt further increasing the tax on tobacco in order to reduce smoking. (15) AQA
Increasing tax will lead to a fall in demand, although; this may only be a small effect, because demand is inelastic. Cigarettes are a demerit good, therefore, consumers may underestimate the costs of smoking; this is a reason to try and stop people smoking.
Also, smoking has many negative externalities (passive smoking, the cost to the NHS is estimated to be £1.5billion) therefore, the social cost is greater than the private cost; if the social cost is greater than the present price, social efficiency can be increased by making smokers pay the true social cost.
Diagram showing the effect of Tax on Cigarettes
A tax shifts the supply curve to the left causing a fall in demand this is more socially efficient because at Qse SMC=SMB.
Arguments against increasing tax on Cigarettes
- Smokers already pay a lot of tax £7bill. Also they do not cost the govt much because they die early and save pension and health care spending
- Demand is very inelastic and therefore increasing price will only cause a small fall in demand
- Higher taxes will increase inequality because the poor will pay a higher % of tax than the rich who are more likely to have given up (However the govt can use other taxes to reduce inequality if it is concerned about this)
- Higher taxes will encourage people to smuggle illegal cig and avoid paying the tax.
It is highly likely that smokers already pay the social cost of smoking given the high level of current tax. Therefore the best argument for increasing taxes is the normative judgement that smoking is bad for people and the govt should intervene to reduce demand.