Discuss whether it would be better if smoking were banned completely or whether it should be subject to indirect tax. (12) Nov 2013 paper 2 AS level.





Ans:

Some people do not fully realize how smoking is bad for society. Smoking cigarettes is classified as a demerit good, and it has a higher external cost for society because it can be viewed as a possible cause of ill health for others. So the government should take the necessary actions to control the rate of smoking. Indirect tax is one of the best actions taken by the government to reduce smoking.
Indirect tax is imposed on goods and services. It includes excise duty, sale tax, and VAT. Imposing an indirect tax on products and services will ultimately increase the cost. As a result, the price level in the market will increase. And raising costs of a business may cause a shift in the supply curve from right to left in the market.   The effect is shown in the diagram.


The business will, of course, try to pass on the cost of the tax to consumers by raising the prices of the goods.  The ability to raise the price of them is limited by elasticity of demand and supply. So it helps to control the rate of smoking from society. However, some economists argue that smoking cigarettes is inelastic goods; therefore increasing prices may fall only smaller in demand. Moreover, higher indirect taxes create inequalities in society. Also, higher taxes encourage people to involve smuggling for cigarettes and avoid paying the tax.       

On the other hand, imposing a law to ban smoking completely may reduce healthcare costs, improve productivity and lower the labor costs. As a result, the demand for labor may increase to employers. In addition,  It will reduce the risk of firing in areas like food, pharmaceutical, and factory sites. A completely banned smoking cigarette is a more fruitful method to keep a healthier environment. Many countries have already forbidden smoking in public places like airports. 

However, a complete ban on smoking includes certain costs. For example, the industry employs a substantial number of workers and needs to pays a huge amount of compensations. If smoking is illegal many workers will be unemployed who work in the sector. At the same time, the government may lose tax revenue that is needed for proving education, public services. If smoking cigarettes is completely banned it will build a black market as the smokers buy the cigarettes illegal way. So it will increase government expenditures on law enforcement.

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