Question

Despite being the third largest tobacco producer in the world, Brazil has developed a comprehensive tobacco control policy that includes a broad restriction on both advertising and smoking in indoor public places, compulsory pictorial warning labels, and a menthol cigarette ban. However, tax and pricing policies have been developed slowly and only very recently were stronger measures implemented. In a survey asking smokers about their reaction to the hypothetical tax increase, smokers most frequently said they would try to stop smoking or smoke fewer cigarettes. However, a considerable percentage responded that they would use alternatives that would reduce the effect of price increases, such as the same brand with lower cost. Tax increases and consequently price increases for tobacco products are addressed in article 6 of The World Health Organization (WHO) Framework Convention on Tobacco Control and are considered to be one of the best policies in reducing the demand for tobacco products . Price increases contribute significantly towards reducing consumption, increasing the number of attempts to quit, promoting cessation, and preventing initiation. Econometric studies have shown that a 10% increase in tobacco prices may lead to a 5 to 8% reduction in the prevalence of smoking .

Using your own knowledge and the article provided above, answer the following questions:

e) Given the information provided in the text, calculate the approximated price elasticity of demand for tobacco products.
f) How far do you agree with the statement that taxes are successful in significantly reducing demand for tobacco products?
g) What other, alternative measures, could country struggling with excessive smoking introduce?
h) Why governments should aim at reducing consumption of tobacco products?

Answer 1

e) price elasticity = % change in quantity demanded / % change in price = -(5 to 8)% / 10% = -0.5 to -0.8

f) if we look at the price elasticity itself, it is less than unitary, which means that the demand falls less than proportionate to a price rise. The example in text also says that a 10% price increase in tobacco product's prices leads to only a 5 to 8% reduction in quantity demanded. Hence I don't agree that the taxes are successful in significantly reducing the demand for tobacco products

g) the country could put in place restrictions on other factors, similar to the one on indoor smoking. One such restriction could be age-related. Say, tobacco products cannot be sold to persons below 25 years of age. Another could be: No tabacco products can be sold in the vicinity of schools, colleges, hospitals, etc.

h) tobacco products harm the health of not only the person who is consuming them but also those in proximity with the smokers. There is also some recent research talking about third hand smoke that can be harmful. All of this creates pressure on the healthcare intrastructure and leads to a reduction in the number of working hours its working population can devote to production. It also leads to sorrow for the families and friends of those who ultimately die of smoking.