[Economics] Smoking 2

Tax

How about tax? What is the 'right' tax level for cigarette, if any? What is the basis of determination what is 'right'? Are taxes fair? Since more low-income than high-income people smoke in developed countries, will increase in taxes impose an unfair regressive burden on low-income taxpayers? What are the proper tradeoffs between individual interests against society's? 

History of cigarette tax:
Many tobacco products have been taxed for centuries, simply because of their inelastic demand, making them an easy source of revenues. The motives behind the taxes imposed are not simply to raise revenue, but also to curb consumption of these products. Tobacco products are taxed in various of means, through excise taxes, VAT, and other ad-valorem taxes, and import duties. 

Tax's effect on Prices:

Increases in taxes result in higher prices for these products. The oligopolistic nature of the cigarette industry and the addictive nature of cigarette demand have important implications for the effects of cigarette tax increases on cigarette prices. 

In a perfectly competitive market with constant long-run cost of production, any tax increase will be passed on to consumers. On the other extreme, a monopolist would share the burden with consumers, with consumers bearing relatively more of the burden when demand is more inelastic. In reality, the market is more like an oligopoly. Tacit coordination between oligopolists could result in a higher price increase than the amount of tax increase. Because the tax schedule serve as a mechanism for collusion to take place. The observation of a higher price increase than original tax hike could also be explained by the followings: if smokers are addicted, and if industry is oligopolistic, companies will rise price by more to obtain maximum profit from current addicted smokers, to compensate for future losses due to reduced smoking initiation resulting from higher price. This also explain why cigarette companies set prices below short-run profit maximising level in order to 'hook' in consumers, thus raising future demand for this product. 

On Fairness:

From an efficiency point of view, principal economic theory argues in favour of a product-specific tax on a product which induces externalities generated through its consumption. 

Does it violate fairness? In terms of horizontal equity, equals should be treated equally. In terms of vertical equity, higher income should be taxed greater (in a proportionate manner). The regressive nature of cigarette taxes is of great debate, while horizontal equity is not a focus in general. The regressiveness is exacerbated by the counter-intuitive finding that tendency for smoking prevalence to be inversely related to income (so that poor taxpayers are paying even more over and above the already regressive tax system). However, evidence suggests that the degree of regressivity normally attributed to cigarette taxes is considerably overstated. Regardless of whether regressive cigarette proves to be a serious concern or not, it is more about whether the overall impact of the tax system is progressive or proportional.

Another way to think about fairness could be brought about by thinking whether smokers should bear the costs of smoking they impose on other members in the society. Can excise taxation be justified on the basis that the tax would fund the negative healthcare service required on nonsmoking taxpayers, who suffer from consequences of second-hand smoke? There are public costs of smoking, namely the direct medical costs of preventing, diagnosing, and treating smoking-related illnesses, the indirect costs associated with lost earnings from work attributable to smoking; and also indirect costs related to loss in future earnings due to premature death.

An optimal tax should equate the revenue generated to the net external costs produced by smoking.

Advertising
Would cigarette advertisement induce more youngsters to pick up the smoking habit? Or is it simply a mean of competition within the cigarette industry that has no overall impact on overall smoking behaviour? Some suggest that there are plenty of mechanisms through which advertisement raise consumption of cigarette. Advertisement can attract young adults to try out smoking, reduce willingness of quitting, and stimulate consumption of smokers, also inducing former smokers to resume their habit by reinforcing the attractiveness of smoking.

There are plenty more control policies around, including the dissemination of information on health consequences of smoking, restrictions on smoking in public areas and work places, and limits of youth access.  It is often hard to single out the impact of individual control practise, but these do affect the the overall decision making process of smokers, however minimal these effects might be. 

[Economics] Smoking 1

Main questions
What are the major questions that economists try to answer in the tobacco industry? Dates back to the 1950s, analysis at the time was motivated by the degree of price elasticity of demand of cigarettes, and the government's interests regarding the concentration of the market (industrial organisation matters). Subsequence analysis focused on health related issues. More emphasis was stressed on how economic forces influence the consumption of tobacco, and whether government should intervene (or how much). An emerging stream called Behavioural Economic helps explain the empirical evidence collected as well.

In economics, the focal point has always been on the relationship between prices and cigarette consumption (demand). Retail prices could be affected by the amount of excise tax government levy on cigarettes. Here are a few very much debatable issues of tax on cigarettes:
Equity of tax - Is cigarette tax a regressive taxation, and if so how much?
Efficiency - How is society welfare affected?
Arbitrage issues - Smuggle and black market?
Cross price elasticity - How the demand of other tobacco products are affected by raising cigarette price?

First of all, we have to ask what factors are fundamental in affecting people's behaviour to smoke? Monetary price is certainly one of them, and this is the physical amount that smokers have to pay in order to obtain the product. However, there are other costs associated with smoking for consumers. Time is one of them, and restrictions and laws in place are another. Limits to access would also impose a greater private cost of smoking. New information from health science also raise the perceived long term costs of smoking.
In addition to costs, advertisements, taste, preferences, and income also affect cigarette demand. A more or less counter-intuitive observation has been found linking income and cigarette consumption. Intuition tells us that if income rises, consumption on a product should rise (i.e. the product is a normal good). However, observations tell us another story, that cigarette is in fact an inferior good.

Individuals weigh all these costs against benefits when deciding whether to smoke (at least that is what we believe rational people do, and the assumption of rationality has always been a contestable issue).

Monetary Price
What role does monetary price play on cigarette demand? Price elasticity of demand is estimated (for overall cigarette demand) to be ranging from -0.3 to -0.5. The fact that more addictive smokers are less responsive to prices also makes intuitive sense.

How to model addiction? Do smokers maximise utility over past, present and future (i.e. are rational)? Or are they myopic, in the sense that they discount future infinitely, and only make trade-offs now?
Price responsiveness is affected by time preference. Addicts with high discount rates (care much about future utilities) will be relatively responsive to changes in money price. Therefore, it might be the case that younger, and lower income persons will be relatively responsive to changes in money prices.

Behavioural economics approach:
Studies examine the impact of price, which is defined as the effort required to receive a dose of a drug, on the amount of addictive substance intake. Outcomes are mostly consistent, with PEOD of -0.56, an inverse relationship between price and cigarette smoking.

Next, we will investigate another closely related issues other than monetary price, which is tax.

Curiosity

Curiosity gets us asking question, and it is the intricacy behind the scene that makes perfect answers non-existence. Too much in what seem trivial has a much deeper and much complex system working from behind.

This could very possibly stem from different thoughts and viewpoints of different people. Or more simply, we are not clones of each other. When we were small, we never were able to grasp the idea why older students in uniform are trying so hard, writing gibberish on a piece of paper. We could not begin to understand what is going on inside their head, only when we grew up would we find out that was just a simple calculus problem. Even for those who we love so dearly (whether it’s your parents or your similar aged girlfriend), we just do not seem to perfectly agree and apprehend their actions or thoughts. This is the ‘other minds’ problem.

Now imagine a grown up adult, and you bet there would not be a problem for adults as it would be for kids. You might think they should be able to interpret and make complete sense of what and why others are doing such and such. Then you meet somebody who is a doctor. What would you ask (apart from asking for medicine)? It shouldn’t be “What do you do?”, because we kind of know what a doctor does (more or less). But we would be fond of asking “What does it feel like to be working with patients all day?”. The curiosity about another person’s interior life and the lack of first-hand experience give us the impulse asking why this, why that and “WHY?!” in our everyday life.

How about the answers we get? We never seem to be satisfied with other’s answers, putting forth our own amateur opinions and challenge their stance. Whether it is a professional doctor telling you to stay in bed for a couple of days or your friend explaining why he broke up with his girlfriend, you are likely to try to put yourself into role of the doctor or your friend’s position and ‘think on your own way’. The result is most likely going to be “I’m right, and they’re wrong”. Or sometimes you would perceive it as, “absolutely ridiculous, it’s just not right”.

There are multiple forces that simultaneously exert their influences on us. We can never pin-point an exact reason why someone does something. Behind every happening is full of inter-related and obscured elements of causes. For instance, think of why some knowing individuals, who would think and act rationally under normal circumstances, would fail to resist deceptions. Under pressure, we start making illogical decisions; under a state of arousal, we wouldn’t even recognise our ‘other-self’, under peer pressure, we choose to act differently; under dangerous situations, our reflexive system takes over and controls our actions in split second. When we ‘blend’ various conditions together and create a virtual environment (just for an example), we would see ourselves acting very strangely compared to what we expect ourselves doing. That’s why so many people get conned in real life and most of the time it’s not just about greed (although it does play a big part). And these could simply be avoided if one or a few elements mentioned above just happen not to exist, by random chance.

Here is another thought: In the event of Manila hijacking of a Chinese tour bus occurred on August 23, 2010, the ‘failed’ rescue assault mounted by the Manila Police District resulted in eight hostages dead and nine injured. In retrospect, the rescue operation is regarded as “incompetent”. But looking at this from another angle, relationship between Filipinos and the Chinese community has always been intense, with regular hijacking taking place across the Philippines. The corrupted police force and government officials could also explain the obvious incompetent and inexperienced actions taken throughout. From a developed world’s point of view, it’s a miserable failure. But it might not seem as shocking for the local people. And taking it further, a third world country might even view this as a success as more than half of the entire tour survived the assault!

This is too simple of an evaluation of one particular event. However, it involves a humongous amount of causes and poses an extremely complex situation already. As I proposed, the event could unfold very differently if one or a few elements of causes had been twisted very slightly (What if the country was less corrupt? What if the hijacker was less time to react, in another words, what if the police force acted earlier?).

[‘What’ and ‘If’ two words as non-threatening as words come. But put them together side-by-side and they have the power to haunt you for the rest of your life: ‘What if?’]

I am not proposing everything happens randomly by chance or follows any statistical distribution, but if you try too hard and dwell too deep as to completely understand something, you would find yourself digging into a hole. It’s great if you are satisfied with the answer you get after all, but most of the time we get too serious and try thinking too hard to solve the ‘other minds’ problem, not realising the very existence of the original problem. So we are ultimately trying to understand something, and that we don’t know what that ‘something’ is. And more worryingly, we might not even know we are in this process of problem solving! It is good to challenge yourself and understand the foundation of events that occurred. However, when it goes over our limit of interpretation, it is best to step back a bit and think shallower. Shallow thinking is not necessarily interesting and it is often not suffice to fulfill our curiosity, but at least it gives us a comforting answer.