Question

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

Case 1

When use of public policy is successful and there is reduction in demand for smoking due to non price factors.

When smoking is reduced due to successful implementation of public policy, in this case the demand for cigarettes will also reduce. In this case demand curve for cigarettes will shift leftward showing a decrease in demand. Assuming supply is remaining same, then supply will exceed demand. As a result equilbrium price of cigarettes will reduce, following law of demand and equilbrium quantity will also reduce.

Thr following diagram shows that initial equilbrium is at point E where quantity demanded and supplied of cigarettes is same. The Equilbrium Price is at point P and Equilibrium Quantity is at Q. Now with decrease in demand the demand curve will shift leftward from DD to D1D1 and will intersect the supply curve at new Equilibrium point E1.At E1, the Equilibrium Price will reduce from P to P1 and Equilibrium Quantity will reduce from Q to Q1.

The above affects are shown in following figure.

Case 2

When reduction in smoking is due to imposition of tax on cigarettes.

With the imposition of tax on cigarettes the price of cigarettes will increase. This will result in decrease in quantity demanded for cigarettes, due to law of demand. ( The law of demand is a fundamental principle of economics which states that at a higher price consumers will demand a lower quantity of a good. The vice versa also holds true ).This will result in upward movement along same demand curve showing decrease in quantity demanded at increased price.

Due to lower quantity demanded less quantity will be supplied and supply curve will shift Upward. The Equilibrium Price and Equilibrium Quantity will decrease.

In the following figure with the imposition of tax the price of cigarettes will increase from P to P1. At price P1, less quantity of cigarettes will demanded. This will cause upward movement along same demand curve. As a result of less quantity demanded, less quantity will be Supplied and the supy curve will shift upward from SS to S1S1. The Equilibrium point will shift from E to E1. The Equilibrium Price will increase from P to P1 and Equilibrium Quantity will reduce from Q to Q1.