Economics of Consumption Tax on Unhealthy Goods.

Topics: Supply and demand, Price elasticity of demand, Elasticity Pages: 9 (2620 words) Published: May 12, 2010
Economics of Consumption Tax on Unhealthy Goods.


Unhealthy consumption prevails in the fields of nutrition, energy and transport. Taxing is one a solution to provide a healthier living. With globalization, qualities of goods do fail to meet the international standards. International movements of goods which damage health are increasing with Cross border marketing, promoting unhealthy behaviours of alcohol and tobacco consumption and unhealthy diets. (Richard Smith, 2003). The report narrows down to Daily life consumption of tobacco and alcohol considering the impact of individual’s income, price of the produce and the substitutions available briefing on supply and demand. The taxing of unhealthy goods is segmented under consumption taxation rather than on income. For addictive goods, the level of consumption today not only causes harm tomorrow, but also increases the marginal benefit of future consumption. Literally every country charges through some sort of ad valorem tax through value added tax, sales tax or an expenditure tax.

Economic Models to study Demand for Cigarettes:

Studies on demand for cigarettes have applied several types of economic models to different types of data with various estimation techniques. In general, two types of economic models are used: the conventional demand model and the addictive demand model. These models have been applied to two types of data: aggregate level data including time-series data for a single geographical unit and pooled cross-sectional time-series data, and individual level of survey data.

Conventional demand models which use aggregate data normally specify the demand equation in a way that the quantity of cigarettes demanded is a function of cigarette prices, income, tobacco control policies and a variety of socioeconomic and demographic factors. But there are two exceptions (Baltagi and Goel, 1987; Peterson et al., 1992), in which a quasi-experiment approach was used to compare changes in cigarette consumption in states in the United States that have raised cigarette taxes to consumption in states where taxes have not changed. A small but growing number of studies have used data on individuals taken from large-scale surveys (Lewit et al., 1981; Lewit and Coate, 1982; Grossman et al., 1983; Chaloupka and Pacula, 1998; Farrelly et al., 1998). These studies differ from those using aggregated data, in that they normally estimate a two-part model, by estimating firstly the probability that an individual will smoke and, secondly, the level of consumption among smokers. The conventional demand model does not account for the addictive nature of cigarette smoking.

There are several versions of the addictive model that have been used for studying the demand for cigarettes: the imperfectly rational addiction model, myopic addiction model and rational addiction model (Chaloupka and Warner, 1999). The rational addictive model is the most recent model used for modelling demand for cigarettes (Becker and Murphy, 1988; Becker et al., 1991; Pekurinen, 1991; Chaloupka, 1990, 1991, 1992; Keeler et al., 1993). The rationality here simply implies that individuals incorporate the interdependence between past, current, and future consumption into their utility maximization processes. This is in contrast to the assumption, implicit in myopic models of addictive behaviours, that future implications are ignored when making the current decision. Empirically, the demand equation is specified as the quantity of cigarettes demanded in the current period being a function of both past and future consumption as well as those other factors included in the conventional demand model.

Becker and Murphy (1988) and Becker et al. (1991) developed several hypotheses from the basic rational addiction model. First, the quantities of the addictive good consumed in different time periods are complementary. As a result, current...

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