Tobacco is a demerit good Market failure refers to either an underproduction or overproduction of a good due to positive or negative externalities. Market failures associated with cigarettes is air pollution, health problems and addiction. For air pollution, the smoke from the cigarettes will pollute the air incuring social costs not included in the private marginal costs thus it is a market failure For health problems, smokers who smoke will give off second hand smoke which can cause lung cancer in other people who do not smoke. This means that money has to be spent to cure these people. However, this costs is not included in the private marginal costs thus there is market failure. Furthermore, there is addiction which will cause stress problems to the family or colleagues at the workplace. These would cause decreases in efficiency and a drop in the work quality. This is not accounted for in the private marginal costs thus it is market failure. The Singapore government has intervened to correct the market failure by imposing taxes on cigarettes making it more expensive for consumers as the price elasticity of demand for cigarettes is inelastic, therefore most of the tax increase will be absorbed by the consumers. Furthermore, the singapore government has also imposed compulsary advertisements on cigarette packets to influence consumer's choice and preferences. Warning consumers of the negative effects of cigarettes, ensuring that consumers have better information when buying cigarettes.
Tobacco is a demerit good
ReplyDeleteMarket failure refers to either an underproduction or overproduction of a good due to positive or negative externalities.
Market failures associated with cigarettes is air pollution, health problems and addiction. For air pollution, the smoke from the cigarettes will pollute the air incuring social costs not included in the private marginal costs thus it is a market failure For health problems, smokers who smoke will give off second hand smoke which can cause lung cancer in other people who do not smoke. This means that money has to be spent to cure these people. However, this costs is not included in the private marginal costs thus there is market failure. Furthermore, there is addiction which will cause stress problems to the family or colleagues at the workplace. These would cause decreases in efficiency and a drop in the work quality. This is not accounted for in the private marginal costs thus it is market failure.
The Singapore government has intervened to correct the market failure by imposing taxes on cigarettes making it more expensive for consumers as the price elasticity of demand for cigarettes is inelastic, therefore most of the tax increase will be absorbed by the consumers. Furthermore, the singapore government has also imposed compulsary advertisements on cigarette packets to influence consumer's choice and preferences. Warning consumers of the negative effects of cigarettes, ensuring that consumers have better information when buying cigarettes.