Cigarette price increase

The article is about the minimum price of cigarettes of RM7 for a pack of 20 cigarettes is not a new measure and has been in place since January 2010. More than half of the minors (53%) said they buy their own cigarettes, while 30% got them from friends in Malaysia, 55% of the adolescent smokers smoke less than 10 sticks per day in Kelantan, 95% of shops sold cigarettes to minors without verifying their age. There are over 80,000 retail outlets selling cigarettes throughout the country and are located near schools. About 31% of teenage boys and 5.3% of girls are smokers. Australia and Singapore have high tobacco tax and successfully reduced smoking among adolescents as a pack of cigarettes costs A$15 (RM38) and S$12 (RM29.80) respectively.

http://thestar.com.my/news/story.asp?file=/2012/9/12/focus/12008752&sec=focus

When a price floor is set, there will be a market failure because that will be an underproduction. Even the price floor is set but it will not easily affect the demand and the supply of the cigarette as smokers will not just stop smoking because of that. A price floor makes the buying price and the selling price results in inefficient underproduction. If the market is underproduction then the surplus problem in the market will be solved. The underproduction will make losses to the social is because it do not satisfy the need of people in the market.

                                       Graph of price floor at RM 10.20

Before this, the market equilibrium of the cigarette is at RM10 and starting from 22 October 2012, government set a price floor for the cigarette at RM 10.20 so all of the suppliers of cigarette must set the price at that level and the market equilibrium now changes. Besides that, there will be a market failure even the government set the higher price floor for the cigarette because government could not stop the smoker from smoking even if the price floor for cigarette is set higher as the smokers will not stop smoking just because of a higher price for cigarettes as smokers are addicted to it and they think that it is a necessity goods.

Graph of perfectly inelastic

The demand and supply of the cigarettes will remain unchanged even if the price of the cigarettes increases. This is due to the fact that smokers are already addicted to it so cigarette has a perfectly inelastic demand. Even if there is a 1% change in price, the quantity sold of cigarette will still remain the same. The demand curve will remain unchanged and the supply curve will remain unchanged also. It is because the demand will still be there as the smokers cannot quit smoking just like that.  

Graph of demand

However, things will change if there is an anti-smoking campaign and a large population of Malaysian participate. Smokers maybe influenced by the campaign and decided to quit smoking. Besides that, government could advertise on the harm that cigarette brings to human no matter whether you are a smoker or second hand smoker. This will increase the awareness of the smoker and they would know what the consequences to them and people around them if they continue to smoke. This may help some of the smoker to stop smoking. In this situation, the demand curve will shift to the left as the demand of the cigarette decreased. If a lot of the smokers join the anti-smoking campaign then there would be a surplus because the demand will shift to the left as the campaign may change the smoker’s mind to quit smoking and the demand of the cigarette will decrease. Furthermore, government should interfere in those cigarette sellers as there is an age limit that set by the government for people who buy cigarette. Government stated that, the cigarette seller are not allow to sell any cigarette to teenagers who are below 18 years old but many of the cigarette seller do not follow the rule and according to The Star, 95% of the cigarette seller in Kelantan do not follow the rule and sell cigarette to any age of people. Government should set some serious punishment to those sellers that are against the rule so that the sellers will follow the rule and the amount of teenagers smoking will be reduced also. Government should make the inspection on them in anytime without informing those so the seller dare not to sell the cigarette to teenager that are below 18 years old. This may make the supply of the cigarette on teenager below 18 decreases and the supply curve will to the left in this situation.

There are no other substitute goods for cigarette as smokers only will buy cigarette as they couldn’t find other thing that able substitute the cigarette. Weed is too heavy to substitute the cigarette so it cannot substitute the cigarette and shisha also couldn’t substitute the cigarette as people who like to smoke shisha doesn’t mean that they must be a smoker and the smokers doesn’t mean that they like to smoke shisha. Besides that, some people are addicted on shisha only but some are only addicted on cigarette. Most of the people will only be addicted to either shisha or cigarette but not both so there are very few substitute goods for cigarette so in this situation, the demand for cigarette is perfect inelastic.

Tobacco taxes increases smokers still demand on it. The cigarette company are able to earn more as the taxes of tobacco increases but people still demand for it. The increase of the taxes will not affect the quantity of people demand for the cigarette. Besides that, the daily cost of the smoker will increase as the price of cigarettes increase but they still buy it. I think this will cause the criminal cases to increase also if the smokers unable to cover their daily cost and they are force to do illegal stuff to get more money for example rob. Furthermore, the black market will happen if the taxes of tobacco are increased.

There will be a black market occur also as the smokers that have lower income will buy the cheaper cigarette that sell in the black market. The black market cigarettes are selling cheaper than normal cigarette as the black market cigarettes are not taxed. It may make some of the smokers to buy those cigarettes in the black market as it is cheaper so the demand for the cigarette in black market will increase and so the demand curve shifts to the right. When the smokers are going to buy the cigarette in black market, they will try different type of cheaper cigarette see which is suitable for them and this make the opportunity cost to happen as they need to spend an amount of money to buy the cigarette to try first before to see which cigarette they like then only they really buy the cheaper cigarette. Vice versa as it happen on the black market cigarette seller also as they need to spend an amount of money to see who are interested on their cigarette before they are able to sell their cigarette.