Activity 3(f)

Activity 3f: Should Australia ban cigarettes like New Zealand?

  1. Cigarette consumption has been linked to a vast number of medical conditions such as lung cancer and emphysema. Those in the vicinity of the smoker also breathe in secondhand smoke which imposes a cost on them even though they choose not to smoke. This means that the consumption of cigarettes is associated with negative externalities in consumption because a cost is imposed on third parties not involved in the transaction. The consumer and producer do not consider the costs they impose when making a decision so there is an overallocation of resources to their production.  Society’s wellbeing would therefore be improved if fewer (possibly zero) cigarettes were consumed.
  2. When cigarettes are consumed, the consumer ultimately experiences a preventable health condition. The treatment for many of these conditions, such as cancer and emphysema, are very expensive and are partially funded through the public health system. This means that those who do not smoke are forced to pay extra taxes to cover the medical costs. In addition, if a person breathes in secondhand smoke over an extended period, they will also experience health problems. This is a third party cost because they have not purchased or consumed the cigarette (i.e. they were not a party to the original transaction between the manufacturer (retailer) and the purchaser of the cigarettes. 
  3. The ban will gradually shift the demand curve to the left. In the respective years the demand curve moves further to the left. Eventually the market for cigarettes  will continue to diminish as the profitability of providing (legal) cigarettes will be inadequate to maintain supply. Of course, there will be the emergence of black-market supply, where the supply of cigarettes will be limited to those who are prepared to break the law. The final result will see a smaller demand and heavily restricted supply, with the final price likely to be relatively high (as the leftward shift of supply is likely to be greater than the leftward shift of demand, which is what tends to happen when governments prohibit goods that remain in demand  by (addicted) consumers.
  4. As part of an evaluation, consider a range of strengths and weaknesses:

     Possible strengths

  • Young people, whose brains are not fully developed are protected from ever starting smoking and they are never going to be able to start smoking legally in their lifetime
  • The regulations are simple to implement and easy to understand
  • Healthcare costs will be reduced in the future

     Possible weaknesses

  • A black market will develop where even more harmful cigarettes are sold
  • The government will have to allocate revenue to the enforcement of the laws
  • There may be some short run structural disruption impacting on those who make a living from cigarettes, such as tobacco farmers and tobacco retailers. There may be some short term unemployment and investment might be needed to reallocate the resources that were once used to grow tobacco and manufacture cigarettes.