NYC hikes price of pack of cigarettes to $13, highest in US
In a news article published by the Washington Times on August 28th, 2017, the city with a reported 900,000 tobacco consumers, has risen the price of a pack of cigarettes to $13 from it’s initial $10 per pack. This article examines New York’s latest price floor, which is a minimum price imposed by the government, on cigarettes.
Cigarette consumption is a rising issue in the United states, and as a demerit good, whose consumption is considered degrading due to the negative effects on the society and consumers themselves, is inelastic in nature. The over-provision of cigarettes can lead to market failure because they are goods that are over-provided by the market and over consumed, leading to negative externalities of consumption.
The city is setting the new minimum price law to decrease the willingness and ability of tobacco consumers to purchases cigarettes at a given price or given time period, however the demand for cigarette packs is currently inelastic due to its low degree of responsiveness of the quantity demanded of cigarettes to an increase in the price per pack, ceteris paribus. The raising of the price consequently ignites stronger activity in parallel markets which will sell cigarettes for cheaper, ultimately backfiring the efforts of the government to decrease consumption.
In this diagram, as price rises from P1 to P2, the quantity demanded declines from Q1 to Q2 at a small scale. This causes movement along the demand curve from S1 to S2 because of the price increase. The demand for cigarettes has a proportionally low degree of sensitivity to a change in price because of its addictive nature, branding and low substitutes. Thus, the $2.50 increase on price per pack of cigarettes will not affect the number of consumers as much as it will the amount they spend. On this account, The burden of the tax is greater on the consumer than the producers because the consumers are essentially receiving less of the good and paying more for it. Sellers, such as pharmacies or convenient stores in New York, on the other hand, suffer great costs as stores have gone down under legislation and many have been stripped of their licenses to sell tobacco products, which is a reported half of the 8,300 firms who distribute tobacco products within New York.
The aim of the price floor is to deter the use of tobacco consumers and society as a whole. Consequently, consumer demand for cigarettes will in the long term contract from Mq to Qd because they will not be willing to spend money for the given quantity whereas the supply will be extended from Mq to Qs. Because Qs exceeds Qd, there is an excess of supply, essentially over-providing the demerit good through its surplus of tobacco. Suppliers of tobacco producers will have greater incentive to supply for the price above the equilibrium Pe, whereby supply is equal to demand, leading to an inefficient allocation of resources within the market. As consumer demand declines, allocative efficiency and deadweight loss will occur, resulting in the overall revenue of the producer of tobacco goods to fall. ABC represents the amount of money the society loses because of loss of producer and consumer surplus. The opportunity cost of proposing a tax, and suffering the losses, is funding government projects that positively impact society as a whole such as parks or education.
Further marginal private benefits exceed marginal social benefits because when individuals smoke, they experience personal satisfaction, however, the negative externalities of consumption are second hands smoke, pollution, cigarette-butt littering and potentially influencing others to smoke cigarettes as well, which is an example of an external cost. Cigarettes are considered a demerit good because they are detrimental to the consumer’s health, can lead to third-party impacts such as second-hand smoke and also costs consumers a lot of money to maintain. The role of cigarettes in society is relative to the public good problem as when cigarettes are produced, they cannot be controlled or limited in terms of consumption. In the long term, the government will benefit from tax sales and as a result, have an increase in overall revenue, however, consumers who cannot afford cigarettes, more specifically low-income users, will alternatively purchase tobacco products on the black market or going out of state where prices are cheaper.
In conclusion, this mutes the positive impact of the law and in reality harms consumers and producers. The use of a tax and price floor alone to reduce cigarette consumption may mitigate the market activity of cigarettes in New York, however, it is not enough to induce a large scale reduction in actual consumption.