IB ECONOMICS - INTERNAL ASSESSMENT FRONT COVER

Teacher Ms. Simrit Kanoongo

http://www.latimes.com/local/political/la-me-pc-health-officials-would-add-2-
Source of the Article
tax-to-pack-of-cigarettes-in-california-20150303-story.html#

Title of the Article Health officials would add $2 tax to packs of cigarettes in California

Date of Article March 3rd, 2015

Date Written December 9th, 2015

Word Count
736
(650–750 Words)

Commentary Number 1

Section 1: Microeconomics

Area of the syllabus

your commentary ❒ Section 2: Macroeconomics
relates to (please tick
the one which is most
relevant) ❒ Section 3: International Economics

❒ Section 4: Development Economics

Checklist for handing work in

Work is in The source of Diagrams are It is within This work was produced individually
the right article is unique included the word and any information from other
order for your portfolio count sources is properly referenced.
Health officials would add $2 tax to packs of cigarettes in California
BY ­ Patrick McGreevy ­ Contact Reporter

After seven failed attempts since 2002, a coalition of health groups and lawmakers is once again
proposing to increase the tobacco tax in California, arguing that an additional $2 per pack of
cigarettes will save lives, in part, by discouraging people from smoking.

Sen. Richard Pan (D-Sacramento), a physician, introduced the latest proposal, which would
generate $1.4 billion a year to fund smoking prevention, research into smoking-related diseases
and expanded treatment services for Medi-Cal patients.

The measure would require a two-thirds vote of the Legislature and the governor's signature to be
placed on the ballot. The tobacco industry has blocked past attempts, but representatives were not
immediately available for comment Tuesday.

Supporters say they are prepared to take it to the November 2016 ballot with a signature drive if
it fails in the Legislature. The state tax on a pack of 20 cigarettes is currently 87 cents, on top of a
federal tax of $1.01 a pack.

“California’s tobacco tax rate is currently among the lowest in the nation with 32 other states
having a higher tax rate,” Pan said in a statement. “SB 591 would put California’s tobacco tax
rate at 8th in the nation and will restore California’s highly effective smoking prevention and
research programs.”

The tax increase is supported by groups including the American Heart Assn., American Lung
Assn. in California, American Cancer Society Cancer Action Network, the California Medical
Assn., Service Employees International Union California, Health Access California, and the
California Hospital Assn.

The health groups said nearly 35,000 Californians died from smoking-related diseases in 2009 and
they estimate the higher tax will save 100,000 lives.

The coalition cited a study by UC San Francisco's Tobacco-Related Disease Research Program
that concluded smoking costs $18.1 billion in California – $487 for each resident -- in direct
healthcare costs and indirect costs from lost productivity due to illness and premature death.
“Every day that goes by without legislation like this, California spends $49 million in tobacco-
related healthcare costs, with taxpayers picking up a substantial portion of that tab,” said Olivia J.
Gertz, president and chief executive of the American Lung Assn. in California.

http://www.latimes.com/local/political/la-me-pc-health-officials-would-add-2-tax-to-pack-of-
cigarettes-in-california-20150303-story.html#
This article talks about a new legislation proposed in California, USA. The legislation demands to

make the tax rate 8th highest in the country by increasing $2 tax on per pack of cigarettes. This

measure is seen to have the potential to solve the problem of over-consumption of Cigarettes.

 
Figure 1: Negative externalities of Cigarettes

Since USA is a free-market economy, consumers are sovereign to buy goods; hence, will

maximize their marginal utility by consuming Q units of Cigarettes, i.e., where MSC=MPB. The

consumers will ignore the costs amounting up to $18.1 billion to the society, like passive smoking;

hence, will not consume the optimum quantity of Q*. Therefore, the price will be higher (P) than

the optimum price (P*). At price P, there is an overconsumption of QQ* quantity of cigarettes and

a welfare loss (MSB<MSC) is evident. Due to these characteristics, one can see an

overconsumption of cigarettes.

This shows that cigarettes create negative externalities of consumption; Government intervention

is needed to correct this market failure (a situation when the market fails to allocate resources 

efficiently in an economy). In California, this will be done through increasing $2 indirect tax on it.

The lawmakers and the health groups in California say that increased tax will save up to 100,000

lives by discouraging people to smoke.

 The current price for the cigarettes that consumers pay for a pack of cigarettes is $6.45, including

$1.88 tax (State tax + Federal tax). After the increased tax rate, consumers will have to pay $8.45

(31.0% increase), wherein the consumers would be paying 45.9% of the money for taxes.

cigarettes at this level will now be P2. This

shift will create a welfare gain, and if this

MSC + new tax
MSC
The tax will shift the MSC upwards to MSC welfare gain is equal to the welfare loss due
Welfare gain
+ new
P2 Tax, as shown in figure 2. This shift to the consumption of cigarettes, the
Welfare loss
P1
Price will
of reduce
P*
the consumption from Q to the following will set-off and the market failure
cigarettes
optimum level, Q*. However, the price of the could be corrected.

MPB
MSB
Cigarettes are addictive goods; hence it is an inelastic product (Relatively low responsiveness of
Q* Q

Quantity of Cigarettes Due to the following characteristic it can be deduced that in the short-
demand to changes in price). 

run this
Figure policy would
2: Correction notfailure
of market be very effective
through taxes in reducing smoking because most people in California

would still be buying cigarettes at the higher cost. This will reduce the consumer’s disposable

income, consecutively reducing the living standards of the people. In addition, the tax will be a

heavy burden on poor because it is levied equally on every person; thereby, increasing the

difference in income. On the other hand, the government will generate $1.4 billion a year from the

increased tax. The government could use this revenue to discourage smoking and treating Medi-

Cal patients. Therefore, the policy could be proven beneficial in the long run and can bring the

massive yearly death toll (35000 – in 2009) down. USA, like Bhutan, could also reduce the

consumption of cigarettes by completely banning the sale of cigarettes. This will cause a great

reduction of smoking in the economy; however, it will impose the threat of an arising black

market and will be a loss to the Government revenue.

Furthermore, the government could also run awareness campaigns and negatively advertise

cigarettes in order to reduce the demand (D  D1) for cigarettes.

 This will contract the supply of

cigarettes and lead to a decrease

in the quantity of cigarettes

demanded (QQ1). However,

through this measure the

producers’ revenue will decrease

from PQ to P1Q1. Hence, they

may decide to move to other

states or possibly other

countries. This, in turn would lead to unemployment in the cigarette industry in California.

Another vital step by the government could be using embargo or quota. This will create a sudden

abnormally low supply to match with the consistently high demand; hence, it will increase the

price significantly. This will make it impossible – despite of the addictiveness – for many people to

buy Cigarettes and therefore achieve the purpose of the tax, i.e., discouraging people from

smoking.

In conclusion, the new legislation is rather a long-term prospect to decrease the consumption of

cigarettes since it generates enough revenue for the government to act for the welfare of the

people, which along with above-mentioned ways of reducing cigarette consumption will

successfully solve California’s problem of over-consumption of cigarettes.

Bibliography

1. http://www.ibtimes.com/price-cigarettes-how-much-does-pack-cost-each-us-state-map-
1553445 (Price of cigarettes in California)

2. Blink, Jocelyn, and Ian Dorton. Economics: Course Companion. Oxford: Oxford UP,
2011. Print.

3. Tragakes, Ellie. Economics for the IB Diploma. Cambridge: Cambridge UP, 2012. 540-
54. Print.

4. Patrick McGreevey. “Health Officials Would Add $2 Tax to Packs of Cigarettes in

California.” Los Angeles Times, Los Angeles Times, www.latimes.com/local/political/la-
me-pc-health-officials-would-add-2-tax-to-pack-of-cigarettes-in-california-20150303-
story.html. Accessed 20 Feb. 2017.