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Efficiency and Equity Concerns with Tobacco Taxation

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Added on  2021/04/16

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The assignment examines the taxation of tobacco in Australia, exploring its efficiency and equity concerns. It highlights the benefits of taxing tobacco, such as increasing government revenue and reducing smoking rates, but also notes the regressive nature of the tax and its disproportionate impact on low-income households. The document discusses the importance of considering both efficiency and equity when evaluating taxation policies.

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Managerial Economics
Name of the Student
Name of the University
Author note

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Introduction
Tobacco; no where necessaries
Object of universal consumption
Harmful for health
Raising health expenditure
Subject to taxation (tobaccoinaustralia.org.au 2018)
Tobacco tax in Australia
Exercise duty since 1901 (health.gov.au 2018)
Tax structure undergone several changes
Recent tax hiking price to AUD $40
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Incidence of tobacco tax
Tax incidence
Division of tax burden
Depend on elasticity
Inelastic demand
Greater burden on buyers (Hubbard et al. 2015)
Inelastic supply
Greater burden on sellers
Demand elasticity of tobacco
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Incidence of tobacco tax
Demand is not as elastic as other consumption good
Increase in tobacco price
Moderate fall in proportion of people smoking and amount of tobacco product
sold (tobaccoinaustralia.org.au 2018)
Tobacco tax raise prices
Result in small reduction in demand

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Incidence of tobacco tax
Inelastic demand for tobacco product
Supply elasticity is greater than demand
Steep demand curve
Tax increases price
Buyers pay a higher price
Sellers receive a smaller price
The difference is the tax amount
Greater burden on buyers
Poorer smokers suffers the most
(theconversation.com 2018)
Higher expenditure on tobacco
Forgone consumption of basic necessities
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Efficiency of tobacco tax
Efficient taxation.
Two criterion
Minimal impact on consumer preference
Relates product price to reflect social cost
Tobacco demand; highly inelastic
Application of inverse elasticity rule (treasury.gov.au 2018)
Higher tax on less inelastic products
Tobacco is neither necessary nor desirable good
Inverse elasticity criteria is appropriate
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Efficiency of tobacco tax
Second criteria of efficiency
Price reflects social cost
Tobacco creates externalities
Smokers impose negative externality on non-smoker
Effect of passive smoking
External cost; not considered in market price(treasury.gov.au 2018)
Taxation increases market price
Better reflection of social cost
Taxation is efficient

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Equity concern with tobacco
tax
Equity means fairness
Related to economic welfare
Defined in terms of ability to pay.
Horizontal equity
Tax neutrality
People having similar ability should pay similar tax amount (Hubbard et al. 2015)
Vertical equity
People with greater ability pay a greater amount of tax
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Equity concern with tobacco
tax
Proportional tax
Progressive tax
Redistribution of wealth
Tobacco tax
Fail to meet equity issue
An important aspect
Two equity issues
Benefit principle
Ability to pay principle
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Equity concern with tobacco
tax
The benefit principle
Smokers imposes greater burden on public health system
Should pay higher.
Thus enhance equity
Ability to pay principle
Tobacco tax does not enhance equity
Violates horizontal equity
People with different ability pay same amount of tax

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Equity concern with tobacco
tax
Greater burden on poor smoker
Does not satisfy vertical equity
Taxation is in regressive nature
Burden felt on fixed and low incomes (treasury.gov.au 2018)
Poor are less likely to reduce smoking
Unhealthy behaviors associated with low cost
Adverse impact on health
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Is tax a good strategy for
revenue collection ?
Tobacco tax
Raises government revenue
Inelastic demand
Lower deadweight loss
More revenue is earned
Not effective in Australia
Revenue from tobacco exercise declines (aph.gov.au 2018)
Consumption and smoking at a record low level
Positive outcome of tax.
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Conclusion
Tobacco; Harmful for health
Needs to be taxed
Australia raise exercise duty
Inelastic demand
Greater burden on buyers
Efficient but not equitable
Revenue declines proportionately
Lower consumption
Accomplishing policy objective

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References
"Department Of Health | Tobacco Taxation". 2018. Health.Gov.Au.
http://www.health.gov.au/internet/main/publishing.nsf/content/tobacco-tax.
"Static.Treasury.Gov.Au".2018. Static.Treasury.Gov.Au.
https://static.treasury.gov.au/uploads/sites/1/2017/06/Document_57.pdf.
"Tobacco Excise Increase – Parliament Of Australia". 2018. Aph.Gov.Au.
https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/
pubs/rp/BudgetReview201617/Tobacco.
"Tobacco Tax Hikes Are Great, So Long As You’Re Not A Poor Smoker". 2018. The Conversation.
https://theconversation.com/tobacco-tax-hikes-are-great-so-long-as-youre-not-a-poor-smoker-
75211.
"Tobaccoinaustralia.Org.Au".2018. Tobaccoinaustralia.Org.Au.http://
www.tobaccoinaustralia.org.au/chapter-13-taxation.
Hubbard, Glenn, Anne Garnett, Phil Lewis, and Anthony O'Brien, 2015. Essentials of Economics,
Third Edition, Frenchs Forest, NSW: Pearson Australia.
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