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ATMC BUS502 Principles of Economics for Accountants – Semester One 2018
Assessment task 2 – Responses to articles – Article 2
DUE via Safe Assign 9pm Sunday 13th May
“Tobacco tax hikes are great, so long as you’re not a poor smoker” By Katie Hirono and Katherine Smith from The Conversation 11th April 2017 is available at:
https://theconversation.com/tobacco-tax-hikes-are-great-so-long-as-youre-not-a-poor-smoker-75211
Access the article at the URL given above and read it carefully. Based on your reading, answer the questions in the spaces below. Use full sentences and show all necessary working. Other references are not necessary but, if you do use any (for example, online economics glossaries) please list at least the URL of your source. Marks are shown and total [15].
(1) Can the market for cigarettes be considered a perfectly competitive market? Explain your answer, referring to at least three characteristics of this type of market structure.
[4]
Definitely, The market for cigarettes in Australia can be considered a perfectly competitive market because a market to be a competitive must have a huge numbers of producers ,who go through a stiff competition with each other to satisfy the desire and needs of a large number of consumers who are aware of the about the information and price about the product. A competitive market is where a no individual producers or a syndicate of a group of producer can establish a monopoly and dictate the price of good and services. Since the market of cigarettes is a market where huge number of buyers and seller are completely aware of the cigarettes and its price. Moreover, the product sold by each of all of the sellers would be identical, hence there would virtually be no variance in the quality of the product. We can thus say the price of tobacco is determined based on the consideration of the demand and supply of tobacco at the industry level. We can clearly consider the market of cigarettes as a perfectly Competitive market.
(2) The article claims that “tobacco tax increases … may discourage smoking”. Use the simple demand and supply diagram to illustrate and explain the effects of an imposition of a tax in the market for cigarettes, identifying the changes in consumer surplus, producer surplus and tax revenue.
[6]
A tax is a wedge between the price buyers pay and the price sellers receive.
Usually the seller is required to collect the tax, so a simple way to see what happens is to think of the tax as an addition to the costs of the supplier, so that the supply curve will move inwards or upwards, that is, so that the tax is added at every value of Q. In Figure displayed below, this is shown as a shift in the supply curve from S1 to S1+t (where t is the per-unit tax). The equilibrium point moves from E1 to E2. As a result of the increased price, the cigarette demand would fall but the supply curve would be altered from its original position S1 to the new position S1+t. The clear consequence of the change in demand and supply would lead to a decrease in the cigarette consumption. The magnitude of decrease in consumption would be determined by primary elasticity of cigarettes in the particular market where tax is imposed.
In the Figure Below, Consumer Surplus is A and Producer Surplus is D. Whereas Tax Revenue is B+D. Hence the Total Surplus is A+B+C+D. But the Tax imposed causes total Surplus to fall by t which is X+Y which we therefore also call Dead Weight Loss (DWL) of the tax, the fall in total surplus that results from a market distortion, such as a tax. Because of the tax, the units between Q* and Q1 are not sold. The value of these units to buyers may be greater than the cost of producing them, so the tax has prevented some mutually beneficial trades.
(3) “Low-income earners tend to find it harder to quit than higher-income earners.”. Explain in your own words what this means in terms of concept of elasticity and use the diagrams below to compare the effects of an imposition of a tax on equilibrium price and quantity when demand is
[5]
a) relatively inelastic and b) relatively elastic
For the habitual tobacco users a psychological phenomenon of craves for nicotine kicks in when the go through anxiety, stress, fatigue and depression. Also the environment, set and setting for quitting a cigarettes is equally if not more important than only the mere willingness of the attempter. Income tends to segregate where people work and live. Low income jobs are always associated with jobs that requires physical, boring or unwanted dirty jobs which is very like to set in any of the above mentioned phycological phenomenon to smoke. Poor smokers often have to make quit-attempts alongside people who are continuing to smoke. But the rich on the other hand are in a atmosphere which is very friendly to one who is willing tom quit. High Incomed Quitter and also consult highly regarded medical consultation and services than can allow themselves with time money and comfort to be diverted away from their smoking habit whereas the Low income Smoker deprived from any of these luxury are even more susceptible to smoke more due to the frustration caused the tax raise in the cigarettes.
If there are a lot of substitutes available, then elasticity will be higher, Goods with a derived demand are less price elastic The price elasticity of a given product is driven by a host of factors whose cumulative effect needs to be taken into consideration. These factors include the nature of good (basic, luxury, griffin), underlying income of the consumer, cheap substitute availability and other factors (Krugman & Wells, 2013).
It is evident from the above demand curve that the nature of demand for the given product is inelastic. This is apparent from the fact that even when the price increase has occurred from P* to P1, the corresponding quantity decrease is comparatively marginal only as denoted through a shift from Q* to Q1. Due to the inelastic nature of demand, the consumption of cigarettes would not decline even though the price may increase as consumers are addicted. This allows the sellers to act a pass through mechanism with a major portion of the incremental tax burden being borne by the final consumer (Krugman & Wells, 2013). This situation is reflected in the diagram shown above where the green area indicates the extra burden for the producers while the pink area indicates the extra burden for the consumers. The diagram clearly highlights the fact that area in pink covers more area than the area in green.
In case, the elasticity of cigarettes increases owing to availability of comparable and cheaper alternatives, then the pink area would shrink and would be substituted by the green area. This would be indicative of the diminishing clout on the part of the seller with regards to pass the incremental tax burden to the consumers as this may lead to a decrease in the demand of cigarettes. Thus, it may be generalised that the incremental burden of tax borne by the producer is directly proportional to the product