Time to increase tax on cigarettes

In the one of the articles in the StarOnline that entitled “time to increase tax on cigarettes” clearly can be explained that government would like to increase the tax that has been imposed to the cigarettes. (http://thestar.com.my/news/story.asp?file=/2012/9/21/focus/12058559&sec=focus). This is what basically been told in the article. It can be explained widely in economic view.

When the government has imposed tax on the cigarettes, the price of cigarettes will be definitely increases. However, as the price of cigarettes increases, there will be no effect on buyers and suppliers, as they would demand for the product as usual or even will be more increases. In general, when a person starts to smoke cigarette regularly, it is hard for him/her to stop from smoking a cigarette even for a day as it is one of his/her addiction. This situation will let the price elasticity of demand to be a perfectly inelastic demand. This means that the price elasticity of demand will be equal to zero, where there will be no effect on buyers and supplier although the price changes. This can be explained through a graph:- 

                In the graph 2.1, it shows how the graph of perfectly inelastic demand looks like, where the demand curve is vertical. It explained that the demand is not changing although the price of cigarettes which at first was RM 10 has changed to RM 20 when the government has imposed the tax on the cigarette. This is shows how concern the government towards Malaysian as the increase the tax that have been imposed on cigarette previously. However, it does not mean the government expectation of reducing the cigarette consumers or smokers when the tax on cigarette being increase. This is because of they are addicted to the cigarette which cannot let them leave their daily routine of smoking the cigarettes in a very short time of period.

            Next, the article can also be explained in the exposure of tax incidence which the concept is more likely to elasticity. There are three types of tax incidence. When the government imposed tax on the cigarette, there will be three ways of paying the taxes. First, the entire tax paid by buyers. Second, the entire tax paid by sellers or the tax is paid by both buyers and sellers. However, in this case, when the government imposed the tax on cigarette, the suppliers would take advantages on it by imposing the entire tax on the buyers. It is because of the demand for the cigarettes is inelastic which does not give any effect to the buyers to purchase the cigarettes even though the price of cigarettes is increase due to the tax imposed by the government. This can be explained through the graph below:-

 In the graph 2.2, it shows how the perfectly inelastic demand graph acts towards the buyers that need to pay the entire tax. The demand curve is vertical while the supply curve shifting to the left when the price of the cigarettes has been added with the tax. It dedicates that the buyers need to pay the tax as the price of cigarette raises when the supply curve shifted to the left. This is a big opportunity to the supplier when they imposed the tax to the buyers as the suppliers are not facing the loss but they will be gaining more profit as they are no paying tax on the cigarette but the buyers do. Thus, there is not a big issue for them if the government decided to increase the taxes on cigarettes in Malaysia as the entire tax is still pay by the buyers. This is one of the types of tax incidence occur which benefits the sellers since the demand of the cigarette are not changed even though the price is increases with the tax.

 That is for the elasticity of demand. There is one incidence will occur when the entire tax is paid by buyers which is relates to the elasticity of supply. When the buyers paid the entire tax that imposed by government, there will be a perfectly elastic supply. This can be explained through a graph below:-

 The graph 2.3 and graph 2.2 are having different looks. However, it gives the same meaning which both having the same concept. In graph 2.3, the supply is having the perfectly elastic while in graph 2.2; the demand is having the perfectly inelastic. The graph above explained that when the government imposed tax on the products, the vertical supply curve will move upwards and the movement along the demand curve will movement upwards too. This changes show that consumers pay the entire burden of the tax. The law of demand also can be applied in this graph where the price is increases due to the taxes, the quantity demanded will decreases from 200 to 100 units. Thus, the explanation above shows that the elasticity of supply on cigarette is perfectly elastic.

In conclusion, when the tax is imposed on cigarettes by government, it does not affect the demand of the cigarette as people are willing to buy the cigarette at any price due to their smoking addiction. This will definitely affect the elasticity of demand to be perfectly inelastic while the elasticity of supply will definitely be the perfectly elastic. As a result, the taxes that government imposed to the cigarette will be paid by the buyers.