Cigarettes and alcohol are inelastic products because they can be said to be ‘necessities’ for some people. Those people may be addicted to those demerit goods, so even if the price is highly raised those people will still purchase those goods. The governments impose indirect tax on to those goods because they are aware of the consequences of those demerit goods. When the tax is imposed, the price of those goods will rise, which means that the quantity demanded may fall (though it might not be a large fall). However, the government prefers to impose tax on inelastic products like cigarettes and alcohol because this will not lead to the consequence of unemployment, which is caused by the large fall in demand for production.
To further understand these challenges it is important to view the decision in light of economic value considerations (Appendix B) of the existing industry environment. Customers: Just looking at overall elasticity of the industry on the basis of Exhibit 3 given in the case. The price elasticity for inflation adjusted average cigarette price was 0.5 with an R squared value of 98% (Appendix C). But this data does not give us the complete picture in terms of customer segments. The overall industry decline was more due to increased awareness of health concerns related to smoking and increasingly difficult regulatory environment, which is reflected well in the Price Elasticity <1.
Setting a price for gas today, would lead to the same effects whether the price is set higher than the equilibrium or lower. Setting the gas price higher would cause people to buy less of it because it will be less affordable to some. Supply for gas will increase as there will be less demand and this will cause a surplus. The market won’t be selling enough gas and gas stations will go out of business. Setting the gas price to a low price would cause a shortage.
Cigarette taxes were placed into effect by the government to achieve two social objectives. The first objective is to reduce the number of people who smoke. By issuing the cigarette tax, the government hoped the higher price of a pack of cigarettes would convince people to quit. The next objective was just another way for the government to raise more revenue. As we all know, the government loves to raise taxes to support their social programs.
Even though this action has caused a short term profitability decline, but for firms’ long-term sustainability, it is vital to keep up with customers’ perceived value, and understanding the core idea of value-pricing strategy. Therefore it was a right move for Marlboro to drop its price on the products. Marlboro is a tobacco company which produces cigarettes. Smokers can grow significantly during a down time of economy, therefore as long as this Brand stays in the mind of smokers, the company could always make sells as long as it stays focusing on its brand management. During the period of hard time, the consumers definitely need a firm which can concern and appreciate the most out of their injected resource, since the shrinking in their purchasing power, we can obviously see the constraint from the already limited resources, any company which fail to implement efficiency with its business process would eventually lead it to the diminished business activities.
Imagine how much more money could be made if marijuana became legal. The extra tax revenue would help society because there would be an extra income that could be used towards health care or other things that benefits society. Drug dealers cause a threat to society and if marijuana was decriminalized drug dealers would lose most if not all of their business and crime would decrease. (SASTISTIC PG 4 5 OF RESEARCH NOTES) if marijuana were to be controlled by the government people would more likely to buy from a store than a shady drug dealer. Thousands of job opportunities would be made available if marijuana were to be decriminalized.
There are too many retail stores that sell cigarettes which makes it impossible to monitor and regulate crime. Also, selling cigarettes in state stores would increase the state of Virginia's tax revenues for the funding of needed projects and public schools. Raising Virginia's excise tax would not prevent criminals from smuggling cigarettes. If Virginia's excise tax is low, criminals will smuggle cigarettes from Virginia to a state with a higher excise tax, and sell the cigarettes on the black market. If Virginia's excise tax is high, criminals will simply sell out-of-state cigarettes in Virginia.
People find it bizarre that the tobacco age is 18, but the drinking age is 21? People care more about alcohol than they do tobacco products, but tobacco is one of the leading killers in the U.S. today. Allowing 18 year olds to start ingesting tobacco products, such as cigarettes or chewing tobacco, at the age of only 18 will give them an earlier start to becoming addicted, and in the long run, shorten their life span. Some think it is absurd letting people smoke, but they cannot go out with friends and drink. Smoking and drinking are both addictive and can have negative effects if used improperly, but smoking one cigarette is more harmful than drinking one beer.
There is a failure to realise that long term better economic welfare also means general higher standards of living, as people have enough money to buy everything they need and some of what they want, competition is rife so drives quality up and prices down, and the government are able to take in more taxes from firms who are much healthier financially. This mass employment may lead to more jobs, but the workers themselves or the way they’re used is hugely inefficient. Another reason that labour production in the UK is so low is the lack of competition. There is a strong body of evidence that competition enhances productivity. So, with a lack of one there is a lack of the other.
In order to combat this deficit spending, taxes are increased to generate more revenue to pay off this spending. In response, consumers will spend less money and save more, thus causing a decrease in consumption and less money in the economy. Soon, there is a decrease in investment because products are not being sold. Prices drop, and the economy lowers into a recession.