Charles Johnson ECO-1000 Word Count: 1887 Words Lecturer: Shane Zhang Due Date: 16th May 2011

Question 1: Many smokers see cigarettes as an absolute necessity, not a want, but a need. So for cigarettes to take a 25% tax hike means that there will obviously be an effect somewhere along the line. It seems as if this line has stopped at small business owners and the sale of impulse goods. Complementary goods for cigarettes, such as magazines and chocolates, have seemed to almost cease, therefore cutting up to 40% of retail shops profits. And with no substitute for cigarettes, the demand will hardly be slowing down a great deal. The elasticity of demand is ridiculous, the price of a pack has risen almost $2.20 on average and yet even this will hardly slow down demand for cigarettes. It doesn t seem to be getting any easier for smokers either, with inflation rising, and bills to pay, the cigarettes themselves are becoming tough to afford let alone the goods or services that always seem to go with the cigarettes. So with this in mind, there are several reports that the black market is becoming a hive of action with millions of dollars worth of cigarettes being sold each year, a severe increase from previous records. Although it seems as if the smoking population has taken the law into their own hands say several accounts with numerous reports of shoplifting of these complementary goods, with suspicion of this action being pointed towards the cigarette tax that has only recently been implemented. So with this in mind, the decrease in demand for complementary goods has not only made an impact on the consumer, but also small business with massive amounts of profit not being present any longer.

Question 2:

Supply Decrease

As previously mentioned in the above paragraph, there are quite obviously more losers than just the consumer with the tobacco tax. Not only the consumer, or the retailer, but there is no question that the producer would also take a hit. With production (supply) expected to decrease somewhat due to increased costs, graph 1, there is no question that demand will either stay constant (due to increase price of Graph 1 product), or increase due to limited supply. This decrease in supply and increase in demand has not created a shift in the curves, either left or right. What the tax has done though is create a movement along the curves, the decrease in supply, Demand Increase the red line, has pushed the equilibrium price closer towards Graph 2 the origin. Although, to counter this, an increase in demand, the blue line, has then increased price as the demand curve rises. This price will then of course increase on what it was before, solely due to the tax hike. These two changes that have affected equilibrium price for cigarettes, has created a deadweight loss, whereby the reduction in economic surplus has resulted from the market not being in competitive equilibrium. The government also, by introducing this tax has disrupted the free market system, which allows supply and demand curves to change as they please. So in essence there are three main groups that will suffer from this tax, producers, with being able to supply as much tobacco as usual, retailers with reduced purchases of impulse or complementary goods, and finally consumers with increased prices for tobacco. Question 3: The definition of a perfectly competitive industry or market, is defined as: markets such that no participants are large enough to have the market power to set the price of a homogenous product, with cigarettes being the homogenous product in question. There are many chains within the

newsagency market, but with over 5,000 newsagencies within Australia, it is the biggest retail and home-delivery network in Australia. Newsagencies nationwide earn a total of $6.5 billion every year and account for over 20,000 employment opportunities. The AWF (Australian Newsagency Federation), have qualified staff that represent Australian newsagencies and their interests in both a legal and business practice sense. As previously mentioned, for an industry to lose perfect competition, cigarettes would need to be sold at one newsagency for example, at a cheaper price than the next. Although since there is a national problem for small business to be able to make profit with the absence of impulse purchases. This would clearly suggest that the industry is indeed as close as possible to being perfectly competitive, in a realistic sense. This, though could be bound to change sometime in the future with the 85% of national magazine sales going to newsagencies bound to drop somewhat due to this tax increase. Question 4: As previously mentioned, perfectly competitive is described as a market such that no participants are large enough to have the market power to set the price of a homogenous product. So by relating this to the question it would suggest that, no tobacco company has the power to use resources, or the product to alter the price for no good reason. In the short run, as explained in the second question, supply would drop due to rising costs of production. This will then cause demand to increase as there are less cigarettes in the market. This would then of course increase supply to meet rising demand, until an equilibrium price was once again found. In terms of a long run, the process at which the system runs now, should be somewhat similar to what it is now, although the profit margin may be marginally lower due to the 25% increase in sales of tobacco. There could also be the case that is external pressures such as inflation and interest rates rise, consumers will no longer be able to afford to purchase cigarettes creating a downturn in demand and sales, which will then lead to potentially lower profits for the producers. Question 5: By introducing a tax to a product that can single-handedly cause so much disruption to the general population is always going to have vast effects around the economy. In the case of cigarettes, not only are the producer, retailer and consumer going to be affected, but also our medical department, our resources, and our employment opportunities that will take a hit. In addressing this anti-smoking campaign I will go through said topics and how they will be altered greatly by the introduction of the tax, and hopefully, in doing so, this will decrease the amount of smokers in Australia. Producers, obviously one of the worst hit groups through the tax hike, would not really have a lot of positives. There will be a smaller profit margin, supply will have to be cut down during the short term due to increased production costs, and also demand may even drop as consumers find the pressures of buying the cigarettes too tough. One fact that might make producers worry slightly is that within every month, tobacco companies lose over 14,000 customers, with 12,500 quitting, and 1,600 dying of cigarette caused illness, (http://www.nicorette.com.au/quitting-for-good/factsabout-smoking/, 2004). This statistic was recorded in 2004, not only before the tax was introduced, but also before many government policies were brought in to attempt to reduce smokers even further. So if we were to increase that number by both smokers that have quit since 2004 due to government policies made prior to 2010, and then the tax increase, which would have only increased non-smoker numbers. Retailers, also will be hit hard as mentioned in almost all of the previous paragraphs. Business such as bakeries etc. will not be affected at all, as tobacco is not an income stream for their business. Although newsagencies, corner stores, tobacconists etc. will be greatly hit with statistics displaying up to 40% less profit with reduced purchases in impulse goods. And even while a 25% may not seem

completely detrimental, it has added to an already ridiculously high tax of $62.09%, (http://www.tobaccoatlas.org/pricesandtaxes.html, 2006). This means that for every packet of cigarettes that you purchase, let s assume, for $18.00, you will be paying $11.172 to the government. This can also be attributed to why small business seems to be struggling, with these companies have to raise the price again just to make it a worthwhile venture for themselves. Cigarettes, and the results of cigarettes can account for a whopping $6.35 billion every year, (http://www.tobaccoatlas.org/pricesandtaxes. html, 2006). This figure doesn t show the money made from cigarettes but the total costs that cigarettes bring about every year. This is not only the cigarettes that are purchased, cost to consumer, but also the medical costs associated with tobaccorelated illness. It is clear to see that with this tax, small business is going to severely struggle to make much of a profit margin in terms of cigarette sales. Now to the consumer, and the statistics above should already be enough of a deterrent, but I would like to focus on the personal costs of the addiction. So what better way to talk about personal costs than by mentioning the money matter. Let s make an assumption that cigarettes cost $16.80 per packet, and that the consumer was to smoke approximately 15 cigarettes per day for a total of 20 years. Now once someone has been smoking that heavily for that period of time, there is very rarely any way back from this point, though let s just assume these figures are accurate about a full-time smoker. So with those numbers in place, it will cost the consumer about $400 a month, $4,600 a year, and a total of $91,980 over the course of the consumption period, (http://www.nicorette.com .au/quitting-for-good/budget-calculator/, 2010). So with the above numerals speaking for themselves, let s talk an even more important matter, health. Statistics are flung around everywhere with smokers and cancers. Though it is a fact that if you are a smoker you are 10 times more likely to have some form of lung cancer, if you are a regular smoker, you are going to die on average, 7-8 years before your life expectancy. These two facts alone should be enough to deter anyone from another cigarette, although is this isn t enough; smoking is the single largest preventable cause of death and disease in Australia, (http://www.nicorette.com.au/quitting-for-good/facts-aboutsmoking/, 2010). These facts and figures, on top of seemingly ever-increasing cost of cigarettes should then cause a massive cut in consumption for cigarettes. Lastly, another subject that can and already has changed the face of cigarette consumption is trends and government policy. Since the year 1992, there have been a total of 21 changes to both federal and state legislation concerning the consumption of tobacco, (http://www.tobaccoinaustralia .org.au/11-5-tobacco-advertising-legislation-violations, 2011). Whether it be from advertising the product, or where you can consume the tobacco, there is no question what-so-ever that the free market in the cigarette segment has been run by the government for quite a while, and nothing looks like changing. And even though the government can t have complete control over cigarettes, social trends seem to be pointing towards a decrease in consumption, especially in the younger age group. With only 7% of boys and girls between the age of 13-15 consistently smoking, (http://www.tobaccoatlas.org/boys.html, 2010) it seems as if this new piece of legislation introduced by the government, may just be the last straw for consumers. Although no matter the tax, the risk, the overall cost of a fresh pack of cigarettes, there will always be someone lighting up.

Bibliography: Australian Newsagent Federation, 2011, Public Policy, Advocacy, Lobbying and Representation , Viewed 9th May 2011, Available from URL:http://www.anf.net.au/advocacy-and-policy.php. Hitt Dave, 2010, Studies on the Economic Effects On Bans , Viewed 9th May 2011, Available from URL: http://www.davehitt.com/facts/banstudies.html. Johnson & Johnson Pacific, 2004-2010, 10 Facts about Smoking , Viewed, 8th May 2011, Available from URL:http://www.nicorette.com.au/quitting-for-good/facts-about-smoking/. Johnson & Johnson Pacific, 2004-2010, Immediate Benefits of Quitting Smoking , Viewed, 8th May 2011, Available from URL:http://www.nicorette.com.au/quitting-for-good/immediate-benefits/. Johnson & Johnson Pacific, 2004-2010, Budget Calculator , Viewed, 8th May 2011, Available from URL:http://www.nicorette.com.au/quitting-for-good/budget-calculator/. World Lung Foundation, American Cancer Society, 2010, Costs to the Economy , Viewed 11th May 2011, Available from URL: http://www.tobaccoatlas.org/costs.html.