According to the BERNAMA news, ‘New cigarette price for 20 sticks set at
RM 7 from September 1 2012’.
According to the news, Malaysia
Health Minister Datuk Seri Liow Tiong Lai said Malaysia Government has decided
to set a price floor for the 20 sticks pack cigarette due to the increase in
demand of cigarette. In this world, cigarette is inelastic goods. The reason
why cigarette is an inelastic good is because the quantity demanded for
cigarette will never have a huge change compare to the change in price. The
equation to count the elasticity of a good is the percentage changed in
quantity demanded over the percentage changed in price.
Price floor is a regulation that
makes it illegal to trade at a price which is lower than a specified level. The
objective of setting a price floor to cigarette is to reduce the consumption of
cigarette because the more you take cigarette the more easily you destroy your
health. It goes same to wine, beer and alcohol drink. These goods are also
inelastic goods because they will be numbers of citizen who are still willing
to purchase no matter how high had the price changed. In the elasticity of
demand stated that the closer the substitute product is, the more elastic is
the demand for it. Therefore, cigarette is an inelastic good because it got
only a little numbers of substitute goods. Price floor which is set above the
equilibrium price will only bring a little changed to the quantity demanded for
cigarette because it is an inelastic good. In microeconomics stated that, the
more inelastic demand of a good, the more slanting the curve is. So, when the
price floor is set above the equilibrium price, the will only be a little
changed in quantity demanded. In my opinion, the way to reduce the consumption
of cigarette is to setting an anti-smoking campaign.
From the graph above, we can see that if the price floor is set above
the equilibrium price, there will be a surplus in market. But because the price
is set above the equilibrium price, there will be an underproduction in
cigarette which will bring the solution to the surplus in market.
Tax incidence is the tax division of
the burden of a tax between buyers and sellers. In microeconomics, it stated
that if a good is an inelastic good then the tax will be pay by the buyers.
Vice versa, if a good is an elastic good, then the tax will be pay by the
sellers. In this case, cigarette is an inelastic good so the tax is pay by the
buyers.
After a price floor is set, there will be a market failure which is
underproduction. A price floor drives a wedge between the buying price and the
selling price and results in inefficient underproduction. The price buyers pay
is the buyers’ willingness to pay which is measures as marginal social benefit.
The price sellers receive is also the sellers’ minimum supply-price, which is
equal to marginal social cost. Therefore, if the market is underproduction,
this will solve the surplus in the market. Price floor makes marginal social
benefit exceed the marginal social cost, shrinks the producer surplus and
consumer surplus, and creates a deadweight loss. An underproduction is a
deadweight loss to the social. The reason why an underproduction will cause
deadweight loss is because the condition does not fulfill the people in the
market. Additionally, after price floor is set, smokers who are low income
earner will look for a cheaper cigarette. In this situation, smokers who are
looking for the cheaper cigarette will find a black market. Black market is a
market where buyers and suppliers will have trade activity behind the real
market which is control by the government. In cigarette market, smokers are
looking for suppliers who are willing to sell cigarette with cheaper price
compare to the cigarette market. On the other hands, suppliers who are in black
market are looking for smokers who are looking for cheaper cigarette. Buyers
and suppliers who are having trade activity in black market will cause
deadweight loss to society. When buyers are looking for cheaper cigarette in
black market will do some survey and this might cost them. This cost is known
as opportunity cost. Vice versa, sellers who are looking for buyers in black
market will have to do some survey also. Thus, opportunity costs incur.
From the graph above, the grey region represent the deadweight loss
occurred. The brown area shows the consumer surplus and the blue area represent
the suppliers’ surplus. The black region shows the tax revenue earn by the
government.
In the market of cigarette, demand
is inelastic. After a tax is added into the price of cigarette, the price will
be higher than previous. Although the price of a cigarette have increase, but
the quantity bought will not change. Due to the inelastic demand, the buyer
will pay the entire tax which is added by the government to the cigarette.
In conclusion, when a price floor is
set for an inelastic good then it will never have a larger change because buyer
for inelastic good will never have a large respond toward the price changed. In
my opinion, if the price floor is higher, smokers who are low income earner
will have no effort to buy cigarette. Thus, rate of crime in social might
increase because smokers have to rob others to get money to buy cigarette for
satisfaction. To reduce the consumption of cigarette, there is not only setting
anti-smoking campaign but also do advertising on effects of smoking on the box
of the cigarette.
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