Tax on Cigarettes
The government should impose taxes on cigarettes in order to curb its vast consumption in the nation’s market. Smoking cigarettes is a habit that has now captured enormous number of consumers including teenagers, the productive population and senior citizens. It is also a major cause for many deaths per annum, not only for smokers but also passive smokers. Being a harmful product for the people and society, the government must take a step to discourage its consumption. Nevertheless, complete banning of cigarettes will result in many labourers and entrepreneurs who are indulged in the production process to be left unemployed. It is therefore imperial for the government to choose the solution of increasing taxes so that prices rise and people opt out of buying cigarettes.
If the government rises excise duty on production and consumption of cigarettes, there will be an inward shift in the supply curve, indicating decrease of supply, due to increased cost of production. A fall in Supply will lead the market price to rise and thus a contraction in demand. This is how, logically, an increase in tax, and a consequent fall in supply will lead to fall in demand, which indicates the reduced ability of people to buy cigarettes. This fall may be significant or insignificant due to price elasticity. Cigarettes have an inelastic demand in most areas because they are subject to habitual consumption. This implies that when the prices rise in lieu of taxes, it is likely that consumers still buy the same amount of cigarettes, and if needed stop buying other necessary things. In such cases, it can be difficult for the poor smokers, who will spend their income on cigarettes, instead of basic needs like food, shelter and education. The government should hence make sure that the producers are not allowed to burden the complete tax on the consumers.
Although it is argued that an imposition of taxes only causes a rise in market price but negligible fall in quantity because of inelastic demand, it should be considered that the government can generate a large amount of revenue from these taxes on cigarettes. This revenue can be used to generate awareness about the disadvantages of smoking through advertisements, campaigns, books, pamphlets etc. and to promote rehabilitation centres for smokers, where these people can get rid of their habit of smoking. Also, the government can use the increased revenue, as a result of high prices of cigarettes, to open sufficient employment opportunities so that smoking can be banned in the future, with no risk of unemployment.
However, exploitation of labour may prevail after taxation. Also, producers can start producing cigarettes illegally to avoid heavy taxes. In such a situation, black markets may thrive, which is not good for the overall economic growth of the nation. In countries where people are very easily prone to indulge in smuggling and illegal production, and where the crime rates are high, it might not be a very productive decision to increase taxes on cigarettes. Another impact of increasing taxes is that, if a group of middle class people were buying cigarettes from high-price brands, they will start buying from lower standard brands. This will boon and encourage the small-scale businesses and their entrepreneurs. This might temporarily reduce poverty. But in the long run, it shall be difficult for the government to handle the increased competition and mass-scale production of cigarettes.
In conclusion, it is advisable for the government to increase taxes on cigarettes to reduce its demand. This increase should be monitored, regulated and executed carefully depending on the conditions of the country. Until a better permanent solution is found, taxing is probably the best solution to the problem of the consumption of this demerit good — cigarettes.