Do new prices for cigarettes deter smoking?

By: Lim Yun Han

According to the article from The Star online, http://thestar.com.my/news/story.asp?file=%2F2012%2F9%2F3%2Fnation%2F11959171&sec=nation, on 3rd of September in the year of 2012, the government announced the price floor for all of the cigarette brand is RM7 and only 20 sticks per pack can be sold in the market. In addition, Dr. Molly Cheah who is the chairman of Malaysian Council for Tobacco Control stated that the price control is not the best way to deter smoking. This is because the price of cigarette is expensive to the poor people but rich people are still able to buy it. Furthermore, the number of smokers in Malaysia had increased recently and it is also affects the teenagers.

In my opinion, I think the price floor of cigarette which is a minimum of RM7.00 per pack will not reduce the number of smokers. This is because since the year of 2010, the price floor for cigarettes is already RM 7.00 per pack. However, the number of smokers is still keep on increasing. It seems to me that, the purpose for the government to impose the price floor for cigarettes is to reduce the number of buyers in cigarettes. Moreover, when the government imposed the price floor for cigarettes, it benefits the suppliers of cigarettes because although the price floor for cigarettes is quite high for some of the buyers, the consumers will not stop to smoke because they still can afford the price floor for cigarettes. Therefore, when the level of consumption is still maintained and the price floor for cigarettes is high, the sellers are still making profit. In this situation, I would argue that not only the number of buyers will not decrease; the number of sellers for cigarettes will keep on increasing. Other than that, based on the article that I had read from Gruber and Zinman, in the smoking decision, teenagers are more focusing on the price of cigarettes. On top of that, they predict that every 10% decrease in the price will caused teenagers smoking increase by 7%. In generally, the easiest way to decrease the percentage of smokers is increase the tax of cigarettes extremely.

On top of that, I think that the government should increase the price floor more in Malaysia by increasing the tax because of the current price floor doesn't work well. Furthermore, more tax charge on cigarettes maybe is a way for the government to change the markets. I believed when the government raise the tax, the cost of smoking will increase also. When the cost of smoking increase, there will be a reduced in the supply. We can draw out the demand and supply graph to demonstrate the point.

From the graph above, we can clearly see that in point A, 'Pa' is the previous equilibrium price and 'Qa' is the previous equilibrium number of cigarettes sold in a year. After the government imposed the tax to the cigarettes, the price of cigarettes will increase which is from Pa to Pb by the tax charged and caused the cigarettes supply curve shift up which is from S1 to S2 by the tax charged. Although the sellers will received a higher price for cigarettes per pack, after the sellers pays the tax for cigarettes, the price that will received by the sellers is at point 'Pc'. Yet, after the government imposed the tax, the quantity demanded for cigarettes decrease. Thus, the new equilibrium point after a tax imposed is point 'B'. 

Moreover, I would argue that after the government in Malaysia charges a tax to the cigarettes suppliers, the suppliers will pass the added cost as much as possible to the consumers. This is due to the sellers are not willing to let their profits decrease. So, they have to rise up the price of cigarettes to make their profit margin same. In addition, the supply curve on the graph above is shift by the exact tax charge by the government. Therefore, no matter the government imposed the tax on sellers or buyers, buyers will always pay for the tax because of the sellers is not willing to lose their profits. On the other hand, I think this will be a win-win situation for the government in Malaysia. By this I mean when the price of cigarette increase extremely, some of the poor people would not afford the cost and they are forced to quit from smoking whereas the sellers of cigarettes will decrease when there is a tax imposed because the price of cigarettes will received by them decrease.

In my opinion, increase the price of cigarette maybe is not a very effective way. This is because the cigarette product is perfectly inelastic demand. So, when the price increases 20%, the quantity demanded for cigarette is only decrease by 1%. Besides, when the government increase the price for cigarette extremely, although some of the poor people couldn't afford it and forced to quit from smoking, there are still a lot of buyers are able to buy the cigarettes.  I think the reason why people are keep on smoking although it is bad for our health is they already addicted to cigarettes and cannot control themselves from cigarettes. 

Other than that, I realised that although increase the price of cigarette is not the best way to decrease the number of smokers in Malaysia, at least it makes some people who are not able to afford to quit. On top of that, it seems to me that the government's 'Tak Nak' campaign is much more effective because it affects all the people in Malaysia but not only the poor people. In my perspective, the government should create more advertisement or organise activities to let the citizens in Malaysia understand the drawbacks of smoking rather than only focusing on the price of cigarettes.