Evaluate the View That Government Should Always Intervene in Markets for Such Goods as Cigarettes and Alcohol

736 Words3 Pages
Cigarettes and alcohol are considered to be demerit goods because they are over provided by the markets, therefore, they are also over consumed by the people. The government believes that those goods are bad for the society and the people, therefore, the government tries to decrease the consuming of those demerit goods. Cigarettes and alcohol are inelastic demands. Their PED value is less than one but greater and zero. These two products will have a small change in the demand when the price is changed, which means that if the price is raised the demand of the product will not change drastically (fall by much in comparison). Therefore, the total revenue gained by the firm will increase. From the diagram to the right, one can see that when the price increases there is an increase in the total revenue. Therefore, when a product like cigarette or alcohol wants to increase its total revenue, then it’ll be wise to increase its price. 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. Therefore, we do not only pay for the demerit goods itself, however, we also pay the taxes that are imposed. As human beings, we do not only pay for the taxes we also ‘pay’ for the negative externalities
Open Document