Free Price Elasticity of Demand Essay Sample
a) Who is likely to be more affected by tax increases on cigarettes: all adults or young adults? Why? Cite elasticity of demand estimates from the article to support you answer.
According to the price elasticity of demand, the increase in price leads to a reduction in quantity demanded. And with the increased taxes will lead to a 10 percent rise in prices of the cigarettes; as a result 42 million smokers would quit smoking as well as preventing 10 million deaths related to tobacco (Ranson, et al. 1998). The effects of the taxes on tobacco will generally affect both adults and children; however majority of the current smokers are adults who will be conservative. This means that the young adults, who are the future smokers, will be more affected since they will be more responsive to the control policies. Data from the US Center Disease Control and Prevention (CDC) show that the young adults who are expected to be regular smokers will reduce; in addition the number of those who will die prematurely will also reduce (Ranson, et al. 1998).
The view that youth are more responsive to price than adults is also supported by the economic theory. According to Ranson, et al. (1998) the price elasticity of demand is estimated to be three times higher among youths aged 15 - 19 years and 1.5 times higher among those aged 20 - 29 years than those who are 30 years and above (Ranson, et al. 1998). Moreover, the low and middle income countries will have lower price elasticity than the high income countries. The effect of the price increase in taxes is also expected to reduce those young adults smoking and their effects to half meaning they will be more affected. Consequently, the adults have already been affected and even those who are not smokers are less likely to practice it. This leaves the young adults more vulnerable to the increase since they are more prospective to smoke. The study also shows that adults aged 30-59 years are more likely to adopt the use of Nicotine Replacement Therapies (NRT) than the young adults (Ranson, et al. 1998). NRT will be a substitute to the cigarettes. In case, the youth are less willing to use the NRT then the increase affects them more.
b) To have the greatest effect on reducing cancer from tobacco use, what other products should the government tax? Why?
Economists argue that when the price of a commodity raises then consumers of the product or commodity will turn to a substitute of that product. Taxing the cigarettes will make the pricing go up hence customers will turn to other products that contain tobacco or nicotine that in turn cause cancer. In this regard, government should focus on any substitute products that are related to tobacco. The government should make sure that the taxes apply to all tobacco products that may be alternatives to commercial cigarettes for example, roll-your-own cigarette. In addition, smokeless products that contain tobacco should also be taxed including chewing tobacco and snuffs.
I doing this the government will reduce the intake of tobacco by the people. The taxation will apply because cancer can be caused by tobacco in any form and therefore any intake should be curbed to reduce cancer from tobacco. In additional, to the price measures the government can also introduce non price measures that are aimed at discouraging cigarette smoking (Ranson, et al. 1998). These would include comprehensive bans on advertising and promotions, prominent warning labels, bans on smoking in public places and mass education and information. This will reduce the effect of secondary smoking by the public and the introduction to smoking of the young generation.
c) What is the long-run elasticity of demand for cigarette smoking? What does this mean for the likely impact of taxes on long-term cigarette use? Why?
Price elasticity varies with the amount of time the consumer takes to respond to the price change (Ranson, et al. 1998). Generally demand becomes more elastic in the long run since the prices will increase at that time. For some cigarette smokers they may still continue with the smoking even after the prices have increased. In this case those addicted may opt to continue with the habit even after price increase; this means that the demand for cigarettes may reduce a little in the short run but later many people will have quit smoking. In fact, this will affect the demand in the long run in view of the fact that many smokers are expected to have quit and less young adults are expected not to start smoking.
The impact of taxes on the long term cigarette use is to increase the prices and reduce demand of the product. Once the cigarettes are taxed then the production costs increases which result to an increase in price. This increase in price will result to a lower demand in the future since less people will be smokers. This is however subject to the income of the people. According to Ranson et al. (1998) the long run elasticity in high income countries may be two times higher; while that in the low and middle income countries may not exceed double. This is because low and middle income countries are more sensitive to price and thus the short run impact may be greater. All in all there will still be an impact in the long run in all countries especially because most will try to quit or turn to substitutes of tobacco to evade the high prices. In addition, the young adults will be protected from indulge in the acts of smoking since they may lack the income to purchase the cigarettes.