Discuss Whether Taxation Is The Most
Discuss whether taxation is the most effective solution to the market failures arising from negative externalities.
Negative externalities are defined as, “[negative] third party effects arising from production and consumption of goods and services which no appropriate compensation is paid.” This means the marginal cost curve only takes into account the private costs and not the external/social costs, and so there is an overproduction of the good or service. This misallocation of resources means there is a deadweight loss and the market has failed. (See Figure 1)(Tutor2u.net, 2014) In the case of cigarettes and smoking, taxation has proven to be very useful in reducing the numbers of youth smokers, which in the long term will be effective in reducing the market failure that occurs. However, cigarettes have an inelastic demand curve, and so taxation has a small impact on the consumption by long-term smokers. Due to this, placing regulations on where and when you can smoke is the most effective solution to the market failures arising from negative externalities. (Australian Bureau of Statistics, 2014)
Figure 1
Those that smoke are three times more likely to die than those that have never smoked, and their life span is shortened by about ten years. Even with “light smoking”, the risk of loss of life is on the same level as those that are morbidly obese. (Walsh, 2013) Australia has one of the world’s lowest smoking rates, and the number of people smoking is steadily declining (See Figure 2). However, the costs from the remaining smokers are still very great – both economically and socially. (Australian Bureau of Statistics, 2014) Economically, there are many costs, such as lower production in firms due to smokers taking more sick days than non-smokers (See Figure 3), higher public health costs for the Government, and exorbitant amounts spent on purchasing cigarettes by individuals. (Taxreview.treasury.gov.au, 2014) (Better Health Channel, 2014) (Air, 2011)
Negative externalities are defined as, “[negative] third party effects arising from production and consumption of goods and services which no appropriate compensation is paid.” This means the marginal cost curve only takes into account the private costs and not the external/social costs, and so there is an overproduction of the good or service. This misallocation of resources means there is a deadweight loss and the market has failed. (See Figure 1)(Tutor2u.net, 2014) In the case of cigarettes and smoking, taxation has proven to be very useful in reducing the numbers of youth smokers, which in the long term will be effective in reducing the market failure that occurs. However, cigarettes have an inelastic demand curve, and so taxation has a small impact on the consumption by long-term smokers. Due to this, placing regulations on where and when you can smoke is the most effective solution to the market failures arising from negative externalities. (Australian Bureau of Statistics, 2014)
Figure 1
Those that smoke are three times more likely to die than those that have never smoked, and their life span is shortened by about ten years. Even with “light smoking”, the risk of loss of life is on the same level as those that are morbidly obese. (Walsh, 2013) Australia has one of the world’s lowest smoking rates, and the number of people smoking is steadily declining (See Figure 2). However, the costs from the remaining smokers are still very great – both economically and socially. (Australian Bureau of Statistics, 2014) Economically, there are many costs, such as lower production in firms due to smokers taking more sick days than non-smokers (See Figure 3), higher public health costs for the Government, and exorbitant amounts spent on purchasing cigarettes by individuals. (Taxreview.treasury.gov.au, 2014) (Better Health Channel, 2014) (Air, 2011)
References: Air, A. 2011. The case for plain packaging of tobacco –. [online] Available at: http://www.crikey.com.au/2011/06/21/the-case-for-plain-packaging-of-tobacco/ [Accessed: 14 Mar 2014]. Australian Bureau of Statistics. 2014. 4125.0 - Gender Indicators, Australia, Jan 2013. [online] Available at: http://www.abs.gov.au/ausstats/abs@.nsf/Lookup/4125.0main+features3320Jan%202013 [Accessed: 13 Mar 2014]. Baker, E. 2013. Tax increases `could stop 250,000 smoking '. [online] Available at: http://www.examiner.com.au/story/1896824/tax-increases-could-stop-250000-smoking/ [Accessed: 13 Mar 2014]. Better Health Channel. 2014. Smoking - the financial cost - Better Health Channel. [online] Available at: http://www.betterhealth.vic.gov.au/bhcv2/bhcarticles.nsf/pages/Smoking_the_financial_cost?open [Accessed: 12 Mar 2014]. BusinessDictionary.com. 2014. What is excise duty? definition and meaning. [online] Available at: http://www.businessdictionary.com/definition/excise-duty.html [Accessed: 13 Mar 2014]. Health.gov.au. 2014. Department of Health | Taxation. [online] Available at: http://www.health.gov.au/internet/main/publishing.nsf/Content/tobacco-tax [Accessed: 10 Mar 2014]. Smokefreeengland.co.uk, (2014). Smokefree England: The Regulations. [online] Available at: http://www.smokefreeengland.co.uk/thefacts/the-regulations.html [Accessed 13 Jul. 2014]. Tutor2u.net, (2014). Negative Externalities. [online] Available at: http://tutor2u.net/economics/revision-notes/as-marketfailure-negative-externalities.html [Accessed 13 Jul. 2014]. Walsh, N. 2013. Risk of early death from smoking higher than thought. [online] Available at: http://www.abc.net.au/news/2013-10-11/smoking-risks-higher-death-disease-lung-cancer/5015588 [Accessed: 10 Mar 2014].