International Baccalaureate

Extended Essay

Economics

To what extent has the excise duty on cigarettes in

Australia diminished the utilization of tobacco items
over the past two years?

Title: Effectiveness of cigarette tax implemented on

tobacco products in the Australian market

Word Count:

Examination Session: 2019-20

Table of Contents

Research Question

“To what extent has the cigarette tax in Australia diminished the utilization
of cigarettes over the past two years”

Introduction
It is now convincingly established that increases in the cost of tobacco lead
to decreases in tobacco consumption with WHO describing it as the most effective
way to encourage addicted tobacco users to quit smoking and prevent children
from starting to smoke.1 In contrast to other type of methods of taxation,
tobacco taxes tend to be widely supported by the public as well as many
government officials. In September 2018, the Australian liberal government
announced that the new budget would contain rises in cigarette prices by 12.5%
annual increase in tobacco excise duty until the year 2020.2 Currently Australia
has one of the highest excise duty on tobacco, around to A$22 per pack of
cigarettes (this is equivalent to around US$17) and this is expect to rise to
up to A$40 per pack by 2020. These increase in excise taxes have been implemented
to decrease the consumption of tobacco. However, not all people will quit or
reduce its consumption substantially in response to the tax. The tax being
regressive means that addicted smokers who won’t quit will face increasing
inequalities, which in turn will reduce their income available for spending on
basic necessities such as housing, food and other leisure activities.

This research aims to investigate the effectiveness of cigarette taxes

implemented on cigarettes in Australia, and the change in responsiveness
in demand for tobacco products. Excise taxes refers to an indirect type of
taxation imposed on the manufacture, sale or use of certain types of goods and
products. My research’s aim is to find the effectiveness of this excise duty
implementation and whether this decision was a successful step to discourage
the use of tobacco amongst Singapore’s population. My research will be focused
between the time period of two years that is between 2018-20 and what was the
change in the demand for cigarettes with the change in price. My research is
connected to the economic theory of demand and supply, consumer and producer
behavior upon the implementation of tax and various other non-price determinants
such as consumer behavior, cultural differences, branding, market size,
substitute goods, and consumer disposable income. One significant factor would
be that of the price which would directly affect the quantity consumed, as
theoretically represented by the law of demand, where there is an inverse
relationship between price and quantity of a good consumed. This research would

1
“ Raise Taxes on Tobacco.” World Health Organization, World Health Organization, 17 Sept.
2011, https://www.who.int/tobacco/mpower/raise_taxes/en/.
2
Mendelsohn, Colin. “Cigarettes Are Rising in Price Again - and It's Happening
Today.” NewsComAu, News.com.au, 31 Aug. 2018,
https://www.news.com.au/lifestyle/health/health-problems/colin-mendelsohn-writes-tobacco-tax-
rise-exploits-and-punishes-addicted-smokers/news-story/85537567d4893adf18f47a666df5d33a.
also consider price elasticity of demand, price elasticity of supply and cross
elasticity of demand.

Description of the tax increase

Australia’s decision to implement 12.5% annual increase of tobacco excise until
2020 was a unique example of government intervention which had complete support
without any objections3, although the 12.5% increase will greatly increase the
price of a pack of cigarettes. Previously the Federal Government implemented a
singular tax increase of 25%, and executed a 12.5% increase each year from 2013
to 2016. This current increase in tax rate is the continuation of that long
term policy. These consistent increase in tax rates have led to a 340% increase
in the cost of tobacco in Australia over the past 20 years4 while gas/household
fuel increased to 181% and the cost of bread and milk went up by 76% and 38%
respectively.5

Background Information
According to Australian Bureau of Statistics National Health Survey, the
prevalence of daily smoking for Australians aged 18 and over from 2016– was
13.8%, and 13.3% among people aged 15 years and over. However, also included
are figures for those 18 years and over who smoke daily, at least weekly and
less than weekly. These figures are produce in the table below.6

3
Woodley, Naomi, and Eliza Borrello. “Tobacco Excise Hike Confirmed Ahead of Election
Budget.” ABC News, 3 May 2016, https://www.abc.net.au/news/2016-05-03/tobacco-excise-hike-
confirmed-as-ahead-of-election-budget/7377936?pfmredir=sm.
4
1. Ting I . Tobacco tax rise comes after cigarette prices soar 343 per cent in 20
years. Sydney Morning Herald 2016
5
“ Media Release - Inflation Continues to Be Subdued (Media Release).” Australian Bureau of
Statistics, Australian Government,
https://www.abs.gov.au/ausstats/[email protected]/lookup/6401.0Media Release1Dec 2016.
6
Tobacco in Australia. “1.3 Prevalence of Smoking-Adults.” Tobacco in Australia, Tobacco in
Australia, https://www.tobaccoinaustralia.org.au/chapter-1-prevalence/1-3-prevalence-of-
smoking-adults.
Table 1: Prevalence of daily, regular and current smokers* 2016—Australians 14+
and 18+ by
sex (%) * Includes persons smoking any
combination of cigarettes (factor-
Legend: made and roll-your-own), pipes or
cigars

† Smoked more than 100 cigarettes

(manufactured or roll-your own) or
the equivalent amount of tobacco in
their life but reports no longer
smoking.
The
tobacco ‡ Never smoked more than 100
market in Australia can be understood and
analyzed in a number of ways. Market share can be formulated either by looking
at sales figures from various industry sources, either by the amount of products
sold or the value obtained from selling the product. In January 2019, there
were 60 available brands and sub-brands of factory made Australian cigarettes
in the market. A sub-brand is a product or service affiliated with the parent
brand but has its own brand name, for example the Marlboro Black menthol which
originates from its parent brand Marlboro.7 Almost the whole cigarette market
in Australia is comprised of three major industry groups: British American
Tobacco Australia, Philip Morris Limited and Imperial Brands. The other smaller
tobacco importers have very limited product ranges in Australia for example the

7
Blindell, Sammy, and Miles Fryer. “Building a Brand with Sub-Brands. Does It Work?” How To
Build a Brand, 12 Mar. 2015, https://howtobuildabrand.org/branding/sub-brands-building-
brand/.
Richland Express and Patron Group. The table below shows the market share of

the tobacco companies in Australia by cigarette volume from 2012 to 2017.

Over this time period the market share for Philip Morris International Inc and
and British American Tobacco have declined by 5-6% while Imperial Brands
increased their market share almost by 11% overtaking Philip Morris which is
the second largest cigarette company in 2017.8

Table 3 shows leading cigarette brands in 2017 ranked by retail volume9

Research Methodology

During research, only secondary sources were employed to collect data. The data
was gathered from various sources such as websites, government publications,
books, news articles, fact sheets, and statistics portal all of which were
verified and trustworthy sources. Non price determinants of demand are key
factors in this research. Determinants such as branding, market size, consumer

8
“Euromonitor International.” Market Research on the Tobacco Industry,
https://www.euromonitor.com/tobacco.
9
“Euromonitor International.” Market Research on the Tobacco Industry,
https://www.euromonitor.com/tobacco.
disposable income and compensatory behaviors are the major factors that may

Source and Justification Limitations and measures taken to avoid it

International news articles were referred to The news might be subject to bias since new
gather detailed data regarding the excise tax articles are influenced by political agendas
and its impact on the various tobacco brands and allegiance making them unreliable. To
across Singapore. ensure the validity of the data being used
random news articles were taken into
consideration rather than from the obvious
popular news broadcasters such as Channel
NewsAsia (in short CNA), furthermore the data
was cross checked by referring back to
government publications.

Government publications were utilized to Government publications might also be bias,

obtain information about the whole country in so the data was referred forth to news
general, excise tax rates on cigarettes, articles publications to prove they are
various other schemes against the consumption valid.
of cigarettes and data for market share of
various cigarette brands

Fact sheets and statistics were used to Numerical figures may have been rounded up and
collect quantitative data regarding prices of some values could have been estimated for
cigarettes per unit level, before and after convenience, to ensure validity that have been
taxes, market share of different cigarette cross checked with other fact sheets and
brands. statistics and official government
publications

IB Economics course book by Ellie Tragakes was No limitations in this case

used to provide supplement material to refer
to various definitions and economic theories.
bring change in the demand and supply of tobacco products in an economy.

Relevant Economic Theories

A fundamental building frame of economic theory is that increasing or decreasing

a price of a commodity leads to increase or decrease in demand of that commodity.
Price elasticity of demand (PED) which is the responsiveness of quantity
demanded to a change in price.10
Although demand for tobacco products is not as elastic as demand for many other
consumer products1 research has consistently shown that increases in the price

10
Price Elasticity of Demand.” PED - Definition | Economics Online,
www.economicsonline.co.uk/Definition
of tobacco products are followed by moderate falls in both the percentage of
people smoking and the amount or number of tobacco products that remaining
smokers consume.2,3 The percentage of people smoking declines because tax
increases discourage non-users from starting, encourage current users to quit
and, also very important, discourage former smokers from starting
again.3 Because increases in tobacco taxes result in higher tobacco prices for
everyone, the effect of even small resulting reductions in tobacco use can be
very large across the whole population. There are four different market
structures: perfect competition, monopolistic competition, oligopoly, and
collusive oligopoly. Cigarettes market can be assumed as oligopolistic market,
as a result, the market will host a huge number of sellers and the size of each
of these sellers would not be large enough so as to affect the market price.
The product sold by each of these sellers would be exactly the same, hence there
would be no difference in the quality of the product sold. In such a market,
the price of tobacco would be determined based on the consideration of the
demand and supply of tobacco at the industry level and not at the firm level.
Smoking in public places does not only affects the health of consumers who are
smoking however, it also affects the health of non-smokers due to passive
smoking. Thus, a cigarette is categorized as a demerit good; a good considered
undesirable for consumers and society, however, over-provided by the market11.
Cigarette consumption produces external cost to society, the research assumes
the economic theory of negative externality of consumption, where the market
fails to allocate resources efficiently. Thus, to correct this market failure
the government has imposed excise taxes to influence the demand of cigarettes
which will change the price elasticity of demand (PED).

11
Demerit Good.” Definition of a Demerit Good | Economics Online,
www.economicsonline.co.uk/Definitions/Demerit_good.html.
To

understand to what extent do the consumers change their demand for cigarettes
as price changes informing me of consumer behavior with respect to changes in
price. Additionally, I took account of cross price elasticity of demand (XED)
which is the responsiveness of demand for one product to a change in the price
of another product.12

As presented in figure 1 allocative efficiency is met when the market allocates

its resources at a socially optimum quantity level Qopt at Price Popt where
allocative efficiency is achieved. Without the externality marginal private
cost (MPC) and marginal social cost (MSC) correspond together and similarly
marginal private benefit (MPB) and marginal social benefit (MSB) correspond
together. The market outcome is determined by the intersection of these curves.
However, during the case of negative externality of consumption, marginal
private benefit (MPB) is greater than the marginal social benefit (MSB). The
external cost to society is represented by the vertical difference between MPB
and MSB curves. The intersection of the MPB and MPC curves, determine the market
price Pt and quantity Qt which deviates from the social optimum.

Research Findings

12
Cross Elasticity of Demand.” Cross Elasticity of Demand | Economics Online,
www.economicsonline.co.uk/Competitive_markets/Cross_elasticity_of_demand.html.
Figure 2: Global Burden of diseases for both sexes and all ages in the year
2013

According
to figure 2, the global risk factor of tobacco is 4th in the world and attributes
to almost 2.5k DALYs (disability-adjusted life years) per 100,000 globally.
Most cases of cancer arise from the consumption of tobacco primarily in the
form of cigarettes. According to the report from WHO tobacco accounts for almost
30% cases of all the cancer patients recorded.

The Australian Burden of Disease study uploaded an estimated value of total

deaths caused by smoking in the year 2015 which caused a total of 20,933 deaths.
This equals to 443,235 years of healthy life lost (‘disability-adjusted life
years’, or DALYs) from death and illness due to tobacco use in Australia in
2015. Tobacco use has been casually linked to the burden of roughly 39 individual
disease which includes 19 types of cancer; seven cardiovascular diseases;
chronic obstructive pulmonary disease (COPD); and asthma. About three quarters
of all DALYs from COPD, lung cancer, and laryngeal cancer were due to tobacco
use.

The Global Burden of Disease Study (GBD) is a comprehensive regional and global
research program of disease burden that assesses mortality and disability from
major diseases, injury and risk factors. GBD is a collaboration of over 1,800
researchers and 127 countries13. Globally more than 800 million deaths and 200
DALYs were recorded in 2017 due to tobacco use. It estimated that in Australia
in 2017, 22,781 deaths and 567,928 disability-adjusted life-years were
attributable to tobacco.14

Table 4: Deaths, by cause, attributed to smoking / total deaths by sex,

Australia, 201015

Figure 3: Deaths attributable to smoking in

Australia by disease entity, as a proportion
of all tobacco-caused deaths, 2010

13
Greenberg, Tony. "An In-Depth Analysis of Global Burden of Disease Study." JournalOfm.org,
M-Journal, 6 August 2015, https://journalofm.org/article/an-in-depth-analysis-of-global-
burden-of-disease-study.pdf.
14
“ GBD Results Tool.” GHDx, http://ghdx.healthdata.org/gbd-results-tool.
15
Contents - MORTALITY FROM SMOKING IN DEVELOPED COUNTRIES,
https://gas.ctsu.ox.ac.uk/tobacco/contents.htm.
Analysis of Data