The Economics of Cigarette Taxation

Running head : THE ECONOMICS OF CIGARETTE TAXATION

The Economics of Cigarette Taxation

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The Economics of Cigarette Taxation

Introduction

Cases of death due to smoking have been increasing for the past years and this alarming condition already caught the attention of many federal officials and enough for them to make the necessary actions in to discourage the consumption of cigarettes , one of the socially unacceptable ' products in the market . One way by which the government attacks this problem on cigarette smoking would be to tighten their tax

policies on cigarettes and other tobacco related products . By putting enough market pressure for prices of cigarettes in the market to increase , the government expects drop on the level of supply and consumption of cigarettes in the market , thereby , resulting on the promotion of secured health on the part of smokers and non-smokers in the society as well as for the government to generate more revenues . At the end of the day , increasing excise tax of cigarettes will provide social welfare improvement

In to fully understand the reason behind excise tax provision on cigarettes as well as on how uplifting of cigarette tax rates promotes social welfare improvement , the following cigarette tax increase case of California and New York will be discuss in details alongside with the impacts of higher cigarette tax on the government , non-smokers , smokers and cigarette retailers /producers

How Taxation Works

Cigarettes , liquors and other products that are considered to be socially undesirable and addictive are being taxed by the government in to control its availability in the market . Sin taxes , or taxes being charged to companies producing socially undesirable products provide welfare distribution equity among the producers and consumers in the market . Taxes charged on cigarettes and other socially undesirable products promotes equity in the distribution of welfare between the consumers and producers through revealing the true and socially optimal price level and production level of a given undesirable product . As for the case of cigarette , the externality emitting agent would be the cigarette producers and the affected party would be the cigarette smokers and those persons that do not smoke . In other words , the tax being imposed by the government to cigarette producers serves as a tool in to force the latter to manufacture cigarettes at a socially optimal level . Oftentimes , the amount of tax being imposed by the government is equal to the negative externality that cigarette producers impose to the society

The main reason behind the taxation of cigarettes in the market is fact that it harms the health conditions of its users as well as those persons who will unwantedly inhale cigarette smokes . Cigarette smokes are considered to be providing negative externalities to the non-smokers and causes health ailments to cigarette smokers . Based from the idea behind externalities , it is a must for the government to impose tax , or other forms of intervention , on negative externality emitting agents in to attain socially optimal level of supply of a given...