The government of Australia is quite concerned about the significant impact of smoking costs in the country’s economy. The government has recently imposed tobacco related taxes to reduce the smoking habit, especially among the young generation. So this paper will investigate the effectiveness of such tax from the economic perspective in Australia.
Considering the rate of smoking in Australia, Cancer Institute NSW Tracking Survey had performed a survey in order to gather responses from the scenario of price increases. The result of survey indicated that 47.5% smokers did the smoking related changes and 11.4% made the product related changes (Adda and Cornaglia, 2011). According to the Victorian Smoking and Health Survey, out of the 45% smokers, 28% tried to quit smoking while 34% was reported to limit their smoking habit. Most of the young smokers had tried to quit smoking due to the price increase. In New South Wales, the maximum rate of quitting or limiting smoking habits have been found compared to the previous years.
Figure 1: Tobacco Smoking in Australia (Source: National Preventive Health Taskforce 9)
The Australian government believes that increase in price of tobacco products may decrease the rate of consumption favourably. According to the estimation of price elasticity of the tobacco products, the demand or consumption will fall 1% due to the increase of price at 10% (Cawley, et al., 2003). A further 2% can be observed in a result of 20% increase of price and so on. However, the research suggests that increase in tobacco costs will follow by the moderate falls in both the amount of cigarettes consumed by the existing smokers and rate of persons smoking cigarettes.
Figure 2: Tobacco Price and Consumption in Australia (Source: ABS 2012)
Different studies on economic theories suggest that the external cost of the tobacco related products are used to be low and it always refrains from recommending the huge taxes on the production or consumption level. In this case, the behavioural economics suggests that the individuals make their rational decision-making by fully aware of the health hazards of tobacco products by the process of overconsumption. It can be influenced by their psychological tendency (Chaloupka, et al., 2001). That is why, the use of taxes, i.e. the government intervention serves as the self-controlling device that assists on reducing the consumption of tobacco. This can result in the quit attempts.
According to the estimation of international consensus, in the high-income countries like Australia, the taxing policy imposed on the cigarettes according to the economic theory can reduce the consumption of tobacco between 1.2% and 3.36%. From the perspective of public health aspect, the increasing tax on tobacco production and selling has a straightforward logic that it encourages the smokers to quit smoking and saves more lives by that process (Korsmeyer and Kranzler, 2009). Therefore, the rationale of this particular section is laid on the price increases on the tobacco products due to the
higher taxes can able to counter some of the harm to the society that is constantly ignored by the private market.
Figure 3: Affordability of Cigarettes and Tobacco Consumption in Australia. (Source: Scollo 2012)
On the contrary to the efficiency of the taxation policy by the way of government’s intervention to correct the market failures related to the consumption and production of tobacco products can also lead to the government failure. By the scepticism of economists related to the tobacco taxation policy, it is generated from the empirical and theoretical concepts regarding to bring the equity and efficiency (Licht, 2011). Though, the economists agrees with the fact that the taxes are required to impose on the product prices when the decisions of the individuals are harming the society as a whole, but they also believes that the interference of taxes should not be made on the private choices that do not harm the others.
The higher taxes will be ineffective if the harm from limiting the overall consumption level of the individuals exceeds the social benefits of reducing the usage of tobacco. Apart from that, the higher tax can be regressive if the inferior groups are allowed to tolerate the excessively outsized burden (Moodie, et al., 2009). They should face with the limited ability to buy and consume other products.
A more growing and recent research of the economic body refers that the application of conventional analysis is inappropriate in case of tobacco taxation. It is recognized that tobacco is an addictive product. The intent of quitting it is widespread concept but the attempt to make the quit is difficult. This process underlies the most policies to control tobacco from advertising restrictions to cessation assistance. However, in this particular case, the issue related to the self-control has not been integrated in the process of analysis regarding the optimal tax levels of tobacco.
Therefore, the process of self-controlling act is among the phenomena that are well investigated under the concept of behavioural economics (Warner, 2006). As part of the process, the psychological research is needed to carry out on the decision making criteria of individuals. This intended process helps to analyse the market outcomes facilitated by the common cognitive and perceptual restrictions and difficulties that are overlooked by more conservative economic models. According to Jonathan Gruber and Botond Koszegi, by using the behavioural economics, the higher taxes are more appropriate than the rates typically recommended.
The above discussion clearly suggests that there is the significant factor lies in the society as well by considering the government failure on imposing higher taxes on the tobacco products (Chaloupkaet al., 2001). The fact generated from different arguments can prove the concept. The economists agree that smokers tend to concentrate to the current reward from smoking than attentive to their future health. In this process, they value the present consumption more than the future outcomes. This can be a potential threat to the overall society as it will reduce the future health expenses of the smokers.
The use of taxing policy to reduce smoking from the society is often considered as paternalistic in the environment. The risk associated with smoking is concerned by all and it will be effective if the rate of smoking declines by the influence of nontax involvements and maximized wealth (Korsmeyer and Kranzler, 2009). Therefore, the global health priorities, behavioural economics should be considered for analysing tobacco prices, taxes and demand behaviour. This certainly can facilitate the process of imposing higher tobacco excises in an attempt to reduce the consumption.
Adda, J. and Cornaglia, F. (2011). Taxes, cigarette consumption, and smoking intensity. Florence: European University Institute.
Cawley, J., Markowitz, S. and Tauras, J. (2003). Lighting up and slimming down. Cambridge, Mass.: National Bureau of Economic Research.
Chaloupka, F., Farrelly, M. and Pechacek, T. (2001). The Impact of Tobacco Control Program Expenditures on Aggregate Cigarette Sales. Cambridge, Mass.: National Bureau of Economic Research.
Korsmeyer, P. and Kranzler, H. (2009). Encyclopedia of drugs, alcohol & addictive behavior. Detroit, Mich.: Macmillan Reference USA.
Licht, A. (2011). Socio-economic variation in use of price minimizing behaviors and subsequent effects on cessation indicators.
Moodie, A., Daube, M. and Carnell, K. (2009). Australia - the healthiest country by 2020. Canberra: Australian Government, Preventative Health Taskforce.
Warner, K. (2006). Tobacco control policy. San Francisco: Jossey-Bass.
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