Drastic hike of cigarettes

     

The articles from http://thestar.com.my/news/story.asp?file=/2012/9/14/focus/12024429&sec=focus. 

           

            Cigarettes have been one of the country’s biggest incomes. The tax imposed on a pack of cigarette, which is 25% per pack according to Passport (2011) has obviously given the country huge revenue since the smokers in Malaysia be seemed not being effected in term of buying behavior despite of the high increase in price of a pack of cigarette. As referred to the article, the author was pointing out how this high excise tax imposed on the cigarettes can lead to the light up of illegal trading of cigarettes, or in the other word, black market. How does this actually happen?  

           

            The total number of smokers in Malaysia is keep increasing with the price of cigarettes. This shows that the demand of cigarettes can be classified as an inelastic demand. No matter how much the price change, the quantity demanded will not change significantly. The consumers’ behavior does not change as they keep buying cigarettes no matter how high the price is, as agreeing the results from Global Adult Tobacco Survey (GATS) which shows that there is no decreased in the consumption of cigarettes.

            Below is the basic graph illustrating the basic concept of demand and supply:

            The blue curve represents the demand of the good in the market. The demand curve is down slopping and shows the negative relationship between price and quantity. As the price goes up, the quantity goes down. People are willing to buy more at a lower price, as they will gain more benefit from a lower price of good. The red curve represents the supply curve. Supply curve has a positive relationship between the price and quantity. As the price goes up, the quantity also goes up. Of course, as supplier, the higher the price, the more they are willing to supply as more profit they will gain. The conflict between the supplier and consumer is overcome with the existing of equilibrium, which is at the point where by the demand curve meet the supply curve. At this point, the supplier agree to sell their product at that particular quantity with the particular price, and the same goes to he consumer, where they are willing to pay at the same price. Therefore, at this point, both consumer and supplier are happy that they both enjoy the same benefit. This concept is applied with the consideration that the good is a normal good.

           

            Next, moving to a more complex diagram:

            The diagram above illustrate on the situation when tax is imposed to the good, and in this case, cigarettes. The original equilibrium price and quantity is at P1 and Q1 respectively, where both consumer and supplier agree with the price to sell and buy. However, when government imposes tax on the good, the supply curve will shift to the left, to the new supply curve, S+tax. With the tax imposes by the government, the consumer price will rise to P2 and in the same time, the supplier price will fall to P. Both consumer and supplier has to pay for the tax for each unit of the cigarettes sold. Consumer surplus has also shrink to the above of P2 line and while the supplier surplus shrink to below the P line. In this situation, part of the consumer surplus and part of the supplier surplus, which the middle square area goes to the government as the tax revenue to the government. Meanwhile, the orange square area is a deadweight loss.

           

            However, in the case of cigarette in Malaysia, the demand cigarette in Malaysia is to be said as inelastic. People keep buying cigarette no matter how high the price of a pack of cigarettes is. Every now and then, the smokers will complain about the increases of tax on cigarettes but at the end of the day, they will still keep buying them. In the case of an inelastic product, the consumer has to bear most of the amount of tax imposed on the good. This is because the supplier realize that how much price the product is, people will keep on buying, thus they take the advantage to release all the cost of tax to the customers. That is why the price of cigarette is so expensive in Malaysia.

            Now, this is why after all, black market arises to become an option. In the black market, the cigarettes are illegally brought into the country or in the other word, smuggling. These cigarettes are definitely free from any tax imposed by the government. In result, the price of the cigarettes becomes lesser than those cigarettes in the legal market. Up to this extend, this is where the issue, which questioned whether the tax imposed on the cigarette, is bringing more benefit or loss. Indeed, the amount of consumption of cigarettes in Malaysia shows a decrease of amount. However, as has been stated in the beginning, the survey done is contradicted. So, where does these smokers get the cigarettes? The answer is obviously through the black market. When this happen, the government also needs to bear with another expenses, the cost of preventing this crime from widen through out the country. At the end, the tax revenue that government receive from the selling of cigarettes going back to the prevention of black market of the cigarette.