Law of Diminishing Returns

I recently read the article ‘The Diminishing Returns to Tobacco Legislation’. This article discusses the different strategies the government has taken regarding cigarettes and the effect they cause to diminishing returns.

 

One thing that struck me as odd is that when the government implemented cigarette taxation from 1985 to 1995, there was a 52% change to the real price of cigarettes yet when a similar change was made in later years, the effect was not strong. Another section of this article points out that while advertisements on cigarette packages warning of the health problems were initially successful they no longer seem to be working. This could be because consumer awareness for health concerns has reached maximum potential awareness. It could also be that consumers also choose to ignore or discredit the warning as the shock value is no longer there.

 

The point of diminishing returns for the government appears to be at a standstill. When taxes are raised and new advertisements are displayed, they don’t seem to have much of an effect on the amount of cigarettes being consumed. Most of the smokers that are left appear to be strongly addicted and will choose to continue feeding their addiction regardless of the efforts the government makes to reduce usage.

 

I believe that some of the money the government has put into raising awareness to the health problems caused by cigarettes has been equalized by reduced health costs. One possible avenue that the government could take is to encourage producers to make a nicotine and chemical free cigarette option. Some smokers may switch to the healthier option if they are addicted more so to the habit then the nicotine. Sales might increase due to non-smokers taking up the habit if the health risks were not as severe. This would in turn increase revenue and reduce health costs which would help offset the money that would be spent on the campaign to produce a new and healthier cigarette option.

 

If a new cigarette option were introduced, demand would likely increase which would in turn drive the supply up. The price of cigarettes may also be driven up if more consumers are now willing to buy the product.

 

Of course the government could always choose to make cigarettes illegal but this would be a very poor decision. Because cigarettes do involve an addiction, this product is considered to be inelastic. Consumers are willing to buy cigarettes regardless of the price and whether or not it is legal. As we know from Chapter 4 of the textbook, the government knows that this product has an inelastic demand and chose to impose a sin tax in order to make a profit. Making cigarettes illegal would be highly ineffective so imposing sin taxes instead was a smart choice for the government. Instead of spending millions or billions of taxpayer dollars on trying to control yet another illegal substance, the government chose to make a profit which they can in turn use to create a healthy economy.

 

Lemieux, Pierre, The Diminishing Returns to Tobacco Legislation,

http://www.pierrelemieux.org/artdiminish.html
site accessed on October 15, 2012