Article that I chose is about raising of indirect taxes on cigarettes in China. This is an example of government intervention in order to try to reduce smoking in China. Cigarettes are a demerit good. Demerit goods are any goods with negative externality of consumption, which means that demerit good is a good that has a bad impact on consumer and society. The market for cigarettes is perfect example of market failure.
MSB- Margin of social benefit
MPB- Margin of private benefit
MSC- Margin of social cost
MPC- Margin of private cost
On this graph we can see that MPB is higher then MSB because cigarettes are harmful to society and also because consumers and producers only consider private benefits. Difference between MPB and MSB is negative externality. Market failure occurs when MSC is greater then MSB and on this graph we can see that MSC is really greater then MSB because this is an example in a free market, so there is no government intervention to prevent this situation and therefore there is welfare loss in a country, in this case China. P3 In the second graph we can see How Chinese government wants to solve their problem with market failure. …show more content…
By increasing indirect taxes to 11% MPC shifts upwards and by increasing it enough Chinese government expects MPC to reach the social optimum and eliminate market failure in China. Welfare loss in China will be eliminated if MPC + Tax is equal to negative externality of consumption. Rise in tax will result in higher price of cigarettes for consumers, which means decrease in a revenue for producers. Government revenue will also increase due to higher prices.
ADVANTAGES AND DISADVANTAGES OF INCREASING INDIRECT TAXES
First advantage of increasing indirect smoking in China is possible reduction of smokers in a long period of time, because smokers will have time to switch to other alternatives, such as e-cigarettes. Second advantage and the main one of increasing indirect taxes is increase in a government revenue. Since there are 300 million smokers in China government revenue will increase enormously and it can be used to fund many other government projects, which are beneficial to society. Government can also use this revenue in order to pay for some anti-smoking advertising. China is also the biggest producer of cigarettes in the world , so by increasing indirect taxes, the production of cigarettes will fall. On the other hand there are some disadvantages of increasing indirect taxes. First problem and disadvantage is greater income inequality, because indirect tax is a regressive tax. If indirect taxes increase, they will lead in decrease in producers revenue, so government may have strong opposition from them. Producers will probably fire some workers in order to reduce production costs, so unemployment will probably rise. Biggest problem of increasing indirect taxes in China in my opinion is a decrease in standard of living, because most Chinese people have low incomes and by increasing taxes they will have to pay more for their cigarette addiction and that will lead to decrease in disposable income and their standard of living. We also have to take in consideration that cigarettes cause addiction which shows us that demand for cigarettes is almost unresponsive due to change in price which means that cigarettes are inelastic good. That is why producers can pass higher load of tax on consumers. Since PED (Price elasticity of demand (PED) is measure of responsiveness of the quantity of
MSB- Margin of social benefit
MPB- Margin of private benefit
MSC- Margin of social cost
MPC- Margin of private cost
On this graph we can see that MPB is higher then MSB because cigarettes are harmful to society and also because consumers and producers only consider private benefits. Difference between MPB and MSB is negative externality. Market failure occurs when MSC is greater then MSB and on this graph we can see that MSC is really greater then MSB because this is an example in a free market, so there is no government intervention to prevent this situation and therefore there is welfare loss in a country, in this case China. P3 In the second graph we can see How Chinese government wants to solve their problem with market failure. …show more content…
By increasing indirect taxes to 11% MPC shifts upwards and by increasing it enough Chinese government expects MPC to reach the social optimum and eliminate market failure in China. Welfare loss in China will be eliminated if MPC + Tax is equal to negative externality of consumption. Rise in tax will result in higher price of cigarettes for consumers, which means decrease in a revenue for producers. Government revenue will also increase due to higher prices.
ADVANTAGES AND DISADVANTAGES OF INCREASING INDIRECT TAXES
First advantage of increasing indirect smoking in China is possible reduction of smokers in a long period of time, because smokers will have time to switch to other alternatives, such as e-cigarettes. Second advantage and the main one of increasing indirect taxes is increase in a government revenue. Since there are 300 million smokers in China government revenue will increase enormously and it can be used to fund many other government projects, which are beneficial to society. Government can also use this revenue in order to pay for some anti-smoking advertising. China is also the biggest producer of cigarettes in the world , so by increasing indirect taxes, the production of cigarettes will fall. On the other hand there are some disadvantages of increasing indirect taxes. First problem and disadvantage is greater income inequality, because indirect tax is a regressive tax. If indirect taxes increase, they will lead in decrease in producers revenue, so government may have strong opposition from them. Producers will probably fire some workers in order to reduce production costs, so unemployment will probably rise. Biggest problem of increasing indirect taxes in China in my opinion is a decrease in standard of living, because most Chinese people have low incomes and by increasing taxes they will have to pay more for their cigarette addiction and that will lead to decrease in disposable income and their standard of living. We also have to take in consideration that cigarettes cause addiction which shows us that demand for cigarettes is almost unresponsive due to change in price which means that cigarettes are inelastic good. That is why producers can pass higher load of tax on consumers. Since PED (Price elasticity of demand (PED) is measure of responsiveness of the quantity of