Analysis of the Legal and Illegal Australian Cigarette Market

This report provides an economic analysis of the Australian cigarette market, examining both the legal and illegal sectors. It begins by analyzing the legal market's supply and demand dynamics, including the impact of education programs and taxation on consumer behavior. The report then explores the market structure, particularly the oligopolistic nature of the industry, and discusses competition strategies such as advertising and promotional offers. Furthermore, it investigates the illegal cigarette market, highlighting the drivers behind its existence, such as tax avoidance and the availability of cheaper products, and compares its demand elasticity to that of the legal market. The analysis extends to the effects of government policies, including taxation, and their impact on both markets. Finally, the report applies the rational choice theory to explain the behavior of consumers and offenders within the context of the illegal cigarette trade, concluding that the illegal market undermines the effectiveness of government policies aimed at reducing smoking. The report uses diagrams to illustrate key economic concepts and references relevant academic literature.

Question 1: The legal Australian cigarette market
Answer 1(a)
Answer 1(b)
D
D
S
S
$31/PACK
$309 for 25 packs
Price in $
o x
Y

In the above graph OY shows the cost of a pack of cigarettes and OX shows quantity of
cigarettes demanded and provided. At the cost of $31 quantity demanded and provided for
cigarettes is 309 million packs of cigarettes. Here it is assumed that the market of cigarette is
perfectly competitive as there is nothing unmistakably referenced in the issue with respect to
showcase structure of the item. In this kind of market cost is chosen by the market powers i.e.,
request and supply. So at point E the two curves cross with one another and vender are prepared
to supply and purchasers are prepared to purchase now.
Answer 1(c)
Education programmes discouraging Cigarette smoking
An education program to demoralise cigarette smoking will will help the consumers to curtail
their need for cigarette smoking. (Saffer & Chaloupka, 2016) This data as for antagonistic
wellbeing effect of cigarette smoking will actuate the cigarette smokers to lessen the quantity of
cigarettes they smoke and in this way would bring about a reduction in demand for
cigarettes.When demand for a decent declines the demand curve shifts leftward or descending.
Following is the necessary figure -

The above figure shows that training with respect to antagonistic wellbeing effect of cigarette
smoking has prompted the individuals to curtail their smoking undertakings and along these lines
has brought about a reduction in demand for cigarettes and has moved the demand curve for
cigarettes descending.
D
D
S
S
P1
Q1
Price in Cig $
o x
Y
P2
Q2
E1
E2
Qty of cig

The new equilibrium is accomplished at point E2. The new equilibrium cost is $P2 per parcel
and new equilibrium amount is Q2 bundles. In this manner, both equilibrium cost and
equilibrium amount has diminished because of instruction program to demoralize smoking
Answer 1(d)
D
D
S
S
P1
Q1
Price in Cig $
o x
Y
P2
Q2
E1
E2
Qty of cig
Consumer burden
Producer burden

The consumer and the producer shares the tax burden. The share is clearly pointed in the
diagram. If the demand is more inelastic than supply, consumers bear the greater part of the tax
burden. Be that as it may, here supply is more inelastic than demand, sellers bear the greater part
of the tax burden. Consumers are not receptive to value changes, and the amount demanded
remains moderately steady when the tax is presented.
Question 2: The market structure of the legal Australian
cigarette market
Answer 2 (a)
The demand bend looked by a competitive oligopolistic firm is kinked demand bend .the
equilibrium is at kinked point. The upper piece of demand bend from crimp point is flexible
which tells increment in cost will bring about a sharp decline in their deals or their demand
which further outcomes in loss or decrease in profit. The lower part from wrinkle point is
inelastic, which explains the diminishing cost of the firm that in turn affect the cost of the
competitor. The rival firm is also unable to earn more and suffers loss. With the goal that why
since firms relationship firms are hesitant to contend in cost in oligopoly. (Gallet, 2016)
Answer 2 (b)
The competition in the cigarette industry is based on unexpected parameters in comparison to
prices.the firms attempt to expand their deals and profits by various estimates like publicizing
and deals promotion. The firms promote their item with the goal that they are better from other
firms product when it comes to consumer's psyches and hence there is an increase in demand.

Another measure is utilizing different offers, in which firms promote free or discounted items to
consumers, dispatch plans like get one get one free for constrained time of period to pull in new
consumer. (Chaloupka, 2012)
Because of the addictive idea of cigarette smoking, since quite a while ago run reaction to a
perpetual change in cigarette costs will be bigger than the underlying, short run reaction, as
certain smokers bit by bit conform to the new costs and these steady changes add to the
underlying effect of cost on some smokers.Estimates from econometric models that record for
the addictiveness of smoking infer that since a long time ago run effect of cost on smoking is
about twofold the short run effect (Euromonitor.com, 2020)
Answer 2(c)
They are getting some information about the benefit boosting condition after the carteling that is
when two oligopolistic firms collaborate with each other about the cost and amount .Therefore
where MR and MC are equivalent that level cost and amount will be chosen. Also, for this
situation it would be a monopoly firm. whose demand curve is inelastic.
Simply check from the net about the benefit expanding conditions for oligopoly firms after
intrigue.

Answer 2 (d)
No the monopoly outcome is not socially efficient.there are two conditions that's a market needs
to fulfill to become socially effect:
i)P=ATC ( allocative efficiency)
Monopoly Equilibrium
MC Supply curve
MR=MC
Price
QuantityQ
P
D Curve

ii)p=MC (productive efficiency).
In monopoly market, p >MC and P >ATC, this characteristic of monopoly tells that monopoly
markets is under efficient.
In monopoly market both conditions doesn't fulfill ,so the collusive oligopoly or monopoly
outcome will not be socially optimal.
Cigarette usage is observed as conflictingly related to an expense. To the extent the eventual
outcome of the test, surveys and the assessments are done beforehand, their outcome says that
development in cost on cigarettes isn't such a great amount of impact on its demand. Various
financial experts saw that cigarette smoking is silly and in this manner not proper for typical
fiscal examination. They acknowledge that demand for cigarettes doesn't watch the fundamental
law of monetary viewpoints including the dropping inclining demand curve. (Wei, 2013)
Question 3: The illegal Australian cigarette market
Answer 3 (a)

The illegal exchange of tobacco is driven by both supply and demand. Consumers attempt to
avoid taxes and providers want to make high profits, simple section in the fringe and so on are
driving reasons for development of illegal market in Australia. Illegal cigarettes are modest and
don't have wellbeing admonition. Expanded tobacco taxes which increment the cost don't prevent
consumers from smoking and they move to the illegal market. Low cost of creation which makes
value low and more appeal make the illegal market solid. Australia's endeavor to cut down
D
D1
S1
S
P1
Q1
Price in Cig $
o x
Y
P2
Q2
E1
E2
Qty of cig
S2
D2
Q3

smoking through higher taxes has just prompted the development of illegal cigarette industry and
loss of income to the government. (Kwak and Lee, 2017) Higher taxes increment the cost and
lessens utilization. Smokers who are value delicate move to the illegal market where cost is less
Thus illegal cigarette advertise in Australia developed in view of tax collection in the legal
market. (Rebecca, Edward, Michae and Mary, 2018)
There are numerous assumptions on which cost versatility depends however the most significant
factor is the accessibility of substitutes .When the consumer can move effectively to another item
when cost builds flexibility is higher. This happens when value ascends in the legal market
because of tax assessment and consumers move to the illegal market where cigarettes are less
expensive.
Answer 3 (b)

D
D
S
S
P1
Q1
Price in Cig $
o x
Y
P0
Q0
E1
E2
Qty of cig
Illegal Market

● Demand curve in case of illegal is relatively steep, hence when cost of providing
service rises, it automatically leads to the rise in price disproportionately.
D
D
S
S
P1
Q1
Price in Cig $
o x
Y
P0
Q0
E1
E2
Qty of cig
legal Market