HI5003 Economics for Business: Tax Impact on Addictive Goods Analysis

This report examines the economic impact of government-imposed taxes on addictive goods, specifically tobacco and wine, in Australia. It references an article discussing the ineffectiveness of cigarette tax hikes in deterring smokers. The analysis applies economic principles like supply, demand, and price elasticity of demand to explain why increased taxes may not significantly reduce consumption of these goods due to their inelastic demand. The report concludes that while reducing consumption of hazardous goods is a valid goal, taxation alone may not be the most effective method and suggests exploring alternative strategies like quota restrictions. Desklib provides access to similar solved assignments and past papers for students.

Running head: ECONOMICS ASSIGNMENT
Economics Assignment
Name of the Student
Name of the University
Author Note

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Table of Contents
Introduction......................................................................................................................................2
Essence of the Article......................................................................................................................3
Economic Interpretation..................................................................................................................3
Conclusion.......................................................................................................................................6
References........................................................................................................................................7

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Introduction
Economics as a discipline has evolved considerably over time with continuous
development and modifications in its conceptual framework, much of which can be attributed to
the real world problems and issues in the economies across the globe which have evolved with
time. Of the different building blocks of the theoretical and conceptual framework of economics,
the primary ones are that of the concept of market, demand and supply as well as the elasticity of
demand of different commodities and services (Baumol and Blinder 2015).
In economics, the term “Market” refers to the open forum where the buyers and the
sellers of different commodities and services interact with each other to decide the quantity of
the commodities or services which are required to be produced as well as the price of the same.
The buyers representing the demand side and the sellers representing the supply side, the demand
and the supply forces thus play crucial role in determining the structure and the dynamics in the
market (Frank and Cartwright 2013). On the other hand, the demand for all the products are not
of same type and the governing bodies of different countries often impose price and quantity
restrictions or regulations in different markets, which in turn have considerable impacts on the
dynamics in the same.
Keeping this into consideration, the concerned report tries to analyze the impact of
government restriction in the form of taxation in the market for goods of addiction like tobacco,
cigarettes and wine, specifically in the economic domain of Australia, in the light of the
economic theories as discussed above. To analyze and interpret the impacts of taxation on such
goods and its effects on the demand pattern of the same, the concerned report refers to the article
named, why the cigarette tax won’t stop people from smoking (NewsComAu 2018).

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Essence of the Article
As per the assertions of the concerned article, the government of Australia has imposed
an increased excise tax on the consumption of cigarettes, by the considerably increased amount
of 13%, which in turn is expected to increase the price of each pack of cigarettes in the country
substantially (Tobaccoinaustralia.org.au 2018). The article also points out to the fact that the
primary motive behind such a hike in the tax on tobacco, as has been portrayed by the
government of the county, is that of decreasing the consumption of such hazardous goods like
tobacco, thereby increasing the overall welfare of the population of the country.
However, as per the assertions of the concerned article, this imposition of a considerably
huge amount of tax on the tobacco products will not have any substantial impact in the aspect of
reduction of demand of the same in the country. This has been explained by the article by the
fact that people in general tend to consume such products to get temporary relief out of there
stressed lifestyle and the increase in the price of such products will not make them realize the
harmful effects of tobacco on their health, thereby helping them to quit smoking (Chaloupka,
Yurekli and Fong 2012).
According to the concerned article, the tax imposed on tobacco and the subsequent
increase in the price of the same is only going to increase the economic agony of the smoking
population of the country as they are going to feel the burden of increased price of cigarette but
are not going to be able to reduce the demand for this “Stress buster” in their life.
Economic Interpretation
The above phenomena, as has been explained by the concerned article can be explained
with the help of the concept of demand and supply as well as with the economic notion of price

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elasticity of demand of commodities and services. According to the law of demand, with the
increase in the price of a product or a service, the demand for the same is expected to reduce and
vice versa, provided that the product taken into consideration is a normal commodity (Hollander
2012). Thus the demand curve for normal goods is usually downward sloping, which can be
shown with the help of the following figure:
Figure 1: Demand curve for normal commodities
(Source: As created by the author)
As is evident from the above figure, with the increase in the price of normal commodities
the demand for the same is expected to decrease and vice versa. However, the reduction in the
demand in response to an increase in the price of the commodity may vary in terms of magnitude
and extent from product to product.

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This is explained by the concept of price elasticity of demand of a commodity. The
elasticity of demand for a commodity or service shows the degree of responsiveness of demand
for the concerned product to one unit change in the price of the same. If due to one unit change
in the price of a product the demand for the same changes more than proportionately, then the
demand for the concerned product is said to be highly elastic (Pindyck and Rubinfeld 2014). On
the other hand if due to one unit change in the price the demand changes less than
proportionately, then the demand is considered to be inelastic. This difference can be shown with
the help of the following figure:
Figure 2: Inelastic and elastic demand
(Source: As created by the author)

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In this context, the demand for tobacco products, in Australia, can be considered to be
highly inelastic. This is primarily because tobacco, being a product of addiction, people do not
usually reduces its demand with an increase in the price of the same. Thus, the imposition of tax
on these products is only going to increase the revenue of the government and not the welfare of
the population of the country, as has been argued by the concerned article (Santerre and Neun
2012).
Conclusion
From the above discussion it can be asserted that tobacco products can be treated as a
health hazard, the decrease in the consumption of which should be one of the primary agenda of
any government. But imposition of high taxes cannot solve the problem fully as the demand for
tobacco products, being highly inelastic, the demand does not decrease significantly with the
increase in the price of the same. Imposition of quantitative or quota restrictions can be more
effective in this aspect and can thus be implemented by the government of different countries,
including Australia.

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References
Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Cengage
Learning.
Chaloupka, F.J., Yurekli, A. and Fong, G.T., 2012. Tobacco taxes as a tobacco control
strategy. Tobacco control, 21(2), pp.172-180.
Frank, R. and Cartwright, E., 2013. Microeconomics and behaviour. McGraw Hill.
Hollander, S., 2012. 2 “Classical Eonomics”. Reflections on the Classical Canon in Economics:
Essays in Honour of Samuel Hollander.
NewsComAu (2018). The new cigarette tax is ridiculous. [online] NewsComAu. Available at:
http://www.news.com.au/finance/money/costs/why-the-cigarette-tax-wont-stop-people-from-
smoking/news-story/c35e7453ae1db1b1bece8aa46e68ac21 [Accessed 26 Apr. 2018].
Pindyck, R.S. and Rubinfeld, D.L., 2014. Microeconomics.
Santerre, R.E. and Neun, S.P., 2012. Health economics: Theory, insights, and industry studies.
Cengage Learning.
Tobaccoinaustralia.org.au (2018). 13.2 Tobacco taxes in Australia - Tobacco In Australia.
[online] Tobaccoinaustralia.org.au. Available at: http://www.tobaccoinaustralia.org.au/13-2-
tobacco-taxes-in-australia [Accessed 26 Apr. 2018].