Question

Two Ways to Reduce the Quantity of Smoking Demanded Public policy makers often want to reduce the amount that people smoke. There are two ways that policy can attempt to achieve this goal. One way to reduce smoking is to shift the demand curve for cigarettes and other tobacco products. Anti-smoking campaigns on television, mandatory health warnings on cigarette packages and the prohibition of cigarette advertising are all policies aimed at reducing the quantity of cigarettes demanded at any given price. South Africa was a pioneer in banning smoking in public places and in 2009 the laws governing where individuals could smoke were tightened further when bans were introduced on smoking in partially covered areas such as parking lots, verandas, and public walkways and in cars if children under the age of 12 were also in the vehicle. Alternatively, policy makers can try to raise the price of cigarettes through the imposition of taxes on cigarette manufacturers.

Using demand-supply analysis, illustrate and explain the effect on the equilibrium price and quantity of cigarettes if:

1.1. Public policy makers encouraged the reduction of smoking through the non-price methods mentioned in the excerpt and were successful. (10)

1.2 Policy makers encouraged the reduction of smoking through raising the price of cigarettes by imposing a tax on the manufacturers of cigarettes

Answer 1

In both graphs, D0 and S0 are initial demand and supply curves intersecting at point A with initial equilibrium price P0 and quantity Q0.

(1.1)

The non-price methods will shift consumer preference away from cigarettes and will decrease demand. This will shift demand curve leftward, decreasing both price and quantity.

In following graph, D0 shifts left to D1, intersecting S0 at point B with lower price P1 and lower quantity Q1.

(1.1)

The tax will reduce the effective price received by sellers, so firms will lower production of cigarettes and this will decrease supply. This will shift supply curve leftward, increasing price and decreasing quantity.

In following graph, S0 shifts left to S1, intersecting D0 at point B with higher price P1 (market price and the price paid by buyers) and lower quantity Q1. Price received by sellers is lower at P2.