Extract F (line 12) states ‘Regulation to reduce consumption of cigarettes is
extensive in the UK.’
Use the extracts and your economics knowledge to assess the view that regulation
is the best way of dealing with the market failure that results from the consumption
of cigarettes. [25 marks]
Tobacco is a demerit good. This refers to a good that is over-provided by the market and
as a result become over-consumed by consumers. The market failure created in these
types of goods is caused by a divergence between the marginal private bene t and the
marginal social bene t curves. This is because when individuals consume demerit goods,
it releases negative consumption externalities onto society. For instance, individuals that
smoke cigarettes enjoy the private bene ts of smoking. However, it also creates several
external costs, which get passed onto third parties. For example, second hand smoke or
the strain it puts on a country’s health services. To reduce smoking rates, the government
usually imposes various types of policies.
DIAGRAM
REGULATION:
-Drivers ned 50 pounds if they smoke in the car with children.
-Pictures warning the dangers of smoking were introduced on cigarette packages in
October 2008.
-Tobacco advertising and promotion are banned, as well as the display of tobacco
products in shops.
-Illegal to sell tobacco products to anyone under 18.
-Smoking is illegal in enclosed public spaces and workplaces.
BUT
-Regulations interfere with consumer choice and operation of the free markets.
-There are 66,000 people in tobacco-related jobs, unemployment.
TAXES
.-Taxes added to increase price and reduce demand (5.91 to 20 cigarette pack) in 2013.
-A high tax does act as a disincentive for young people who might be tempted to start
smoking if it was cheaper.
-12 billion pounds collected from taxes on tobacco, injections into economy, economic
growth.
BUT
-Demand for cigarettes are price inelastic. If people are addicted, they are willing to pay a
higher price so in the short-term this policy is of limited effect.
-Encourages people to buy cigarettes on the black market. This means that government
looses tax revenues and doesn’t succeed in reducing demand.
fi fi fi fi
extensive in the UK.’
Use the extracts and your economics knowledge to assess the view that regulation
is the best way of dealing with the market failure that results from the consumption
of cigarettes. [25 marks]
Tobacco is a demerit good. This refers to a good that is over-provided by the market and
as a result become over-consumed by consumers. The market failure created in these
types of goods is caused by a divergence between the marginal private bene t and the
marginal social bene t curves. This is because when individuals consume demerit goods,
it releases negative consumption externalities onto society. For instance, individuals that
smoke cigarettes enjoy the private bene ts of smoking. However, it also creates several
external costs, which get passed onto third parties. For example, second hand smoke or
the strain it puts on a country’s health services. To reduce smoking rates, the government
usually imposes various types of policies.
DIAGRAM
REGULATION:
-Drivers ned 50 pounds if they smoke in the car with children.
-Pictures warning the dangers of smoking were introduced on cigarette packages in
October 2008.
-Tobacco advertising and promotion are banned, as well as the display of tobacco
products in shops.
-Illegal to sell tobacco products to anyone under 18.
-Smoking is illegal in enclosed public spaces and workplaces.
BUT
-Regulations interfere with consumer choice and operation of the free markets.
-There are 66,000 people in tobacco-related jobs, unemployment.
TAXES
.-Taxes added to increase price and reduce demand (5.91 to 20 cigarette pack) in 2013.
-A high tax does act as a disincentive for young people who might be tempted to start
smoking if it was cheaper.
-12 billion pounds collected from taxes on tobacco, injections into economy, economic
growth.
BUT
-Demand for cigarettes are price inelastic. If people are addicted, they are willing to pay a
higher price so in the short-term this policy is of limited effect.
-Encourages people to buy cigarettes on the black market. This means that government
looses tax revenues and doesn’t succeed in reducing demand.
fi fi fi fi
