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Externalities are seen in almost every area of economic activity. They can be defined as third party effects arising from the production and/or consumption of goods and services for which no appropriate compensation is paid. Externalities are likely to cause market failure if the full social costs and social benefits of production and consumption are not taken into consideration. Social cost includes all the costs of production of the output of a particular good or service. We include the third party (external) costs arising, for example, from pollution of the atmosphere. It is therefore important to consider how this theory of externalities justifies the government legislating on smoking. Cigarettes in the UK have an enormous taxation rate – in 2009 10.5 billion ponds were raised in tax revenue from tobacco for the UK government. People usually tend to smoke a lot when they are drinking so if they are not allowed to smoke inside the clubs and bars, there is not as big as a demand as if people were allowed to smoke in bars and clubs. This means that the government loses the money it could have raised from the tobacco taxation if there was a bigger demand. The money that has been raised from putting taxation on tobacco is usually invested in healthcare as a public good so it can be perceived as an external benefit. However, government this way avoids the damage of issues that are caused by smoking, such as less productive workforce and the vast amount of money that has to be put into healthcare because of the health issues caused by smoking. So the government loses money but at the same time invests in the long-run welfare and healthcare of the people who are living in Scotland. Some benefits might include women smoking less, therefore living longer or having healthier babies. These benefits of the government legislating on smoking might seem insignificant now because it could be argued that people who smoke, will find a way to smoke anyway, especially with bars and clubs designing special outside areas for smokers, but the external benefits are much more important – the reduction of secondary smoking health costs (non-smokers now do not have to suffer from other people smoking indoors), especially when the smoke that accumulates indoors only contributes to damaging health to people who are in these rooms. Also, not being able to smoke inside discourages more people from smoking and the frequency of smoking, because a lot of people just can’t be bothered to go outside. This is the case especially amongst young people where smoking is still considered a social activity so if they can’t smoke in bars and clubs – they won’t. Also people are discouraged from smoking in a way that doesn’t affect the black market which is good because then the government does not have to spend extra money on dealing with the black market while improving the health of the people. Taking all these arguments into account, the theory of externalities can be used to justify government legislation on smoking.
SOCIAL COST = PRIVATE COST + EXTERNALITY
Supply and demand is perhaps one of the most fundamental concepts of economics and it is the backbone of a market economy. Demand refers to how much quantity of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price. Supply represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. Price is a reflection of supply and demand. The relationship between demand and supply are all about the allocation of resources. In market economy theories, demand and supply theory will allocate resources in the most efficient way possible. The law of demand has to be considered as well because it helps to explain how the ban of smoking in clubs and bars affect the market of alcohol sales in these places, the market for cigarettes and the market for Nicorette chewing gum. The law of demand states that if all other factors remain equal, the higher the price of a good, the less people will demand that good or otherwise put, the higher the price, the lower the quantity demanded.
Firstly, the market for alcohol sales in terms of supply and demand will be analysed.
The market for alcohol sales in pubs and clubs increases, as ,first of all, a lot of non-smokers who did not come to pubs and clubs, or came very rarely, just because they did not like the effects smoking had on them – smelly clothes, the air filled with smoke, etc. secondly, smoking is a social activity and if people are not going to socialise while smoking, they will do that while drinking. Secondly, cigarettes effect the drunkenness of people, so if they are not able to smoke while drinking then they are going to drink more to make up for the fact that they could have been more tipsy if they smoked.
Secondly, the effect of banning smoking in enclosed public spaces on the market for cigarettes will be analysed. The market for cigarettes, even though cigarettes being in inelastic demand, will slightly decrease as people usually tend to smoke more when they drink and a lot of people who don’t smoke daily, do smoke when they are drinking, especially on nights out with friends at bars and clubs. Therefore, as the demand for cigarettes decrease, the price falls too while supply remains the same – D1 shifts to D2. After the demand has decreased, the supply can be increased so S1 shifts to S2 and the price goes up.
The market for nicorette chewing gum will face a bigger demand as people will find it hard not to smoke when having a night out, so they will try to ease that with the Nicorette chewing gum.
Like the law of demand, the law of supply demonstrates the quantities that will be sold at a certain price. This means that the higher the price, the higher the quantity supplied. Producers supply more at a higher price because selling a higher quantity at higher price increases revenue. At the point of equilibrium, the allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded.
The production possibility curve is a graphical representation of the alternative combinations of the amounts of two goods or services that an economy can produce by transferring resources from one good or service to the other. This curve helps in determining what quantity of a non-essential good or a service an economy can afford to produce without jeopardizing the required production of an essential good or service. Under the field of macroeconomics, the production possibility curve (PPC) represents the point at which an economy is most efficiently producing its goods and services and, therefore, allocating its resources in the best way possible. If the economy is not producing the quantities indicated by the PPC, resources are being managed inefficiently and the production of society will dwindle. The PPC shows there are limits to production, so an economy, to achieve efficiency, must decide what combination of goods and services can be produced.
Sales of cigarettes are falling by the impact of higher taxes mean that smokers must spend more to finance their habits according to new research from the market analyst Mintel. In the past, increases in the real value of taxation on cigarettes has had had little effect on demand from smokers because demand has been inelastic. But there are signs that a tipping point may have been reached. Sales of nicotine replacement therapies such as patches, lozenges and gums have boomed by nearly 50% over the past five years to around £97 million. But for every £1 spent on nicotine replacement, over £130 is spent on cigarette sticks.
A ban on smoking in public enclosed places definitely came as a big issue to the Scottish smoking part of the society. So far, because of the taxation of cigarettes, the Scottish economy has only benefited, as cigarettes have and inelastic demand and even though more people are trying to quit smoking or lots of them already have, there is the growth of the black market and growth in people buying duty-free cigarettes, the ban hasn’t had a significant effect neither on the cigarette market, nor for the Scottish economy. However, because these changes keep happening – people quitting smoking, etc, it is very likely that this will have an impact on the Scottish economy in the future.
The ban on tobacco advertising in 2003 and effective public health campaigns have helped smokers to give up. The ban on smoking in pubs, clubs and restaurants in March 2006 has only helped the decline is set to continue. However, smoking is hardly declining among socially disadvantaged groups. Currently, the government is unlikely to reduce health inequalities and in fact the gap is set to widen. It isextremely important that the government increases measures to help poorer smokers to quit by widening access to ‘stop smoking’ treatments and maintaining funding of its mass media educational campaigns. The use of nicotine patches and gum, which are intended to reduce dependency on cigarettes, has helped many smokers give up.
The UK has a higher tax rate on cigarettes than any other European Union country and according to figures from Her Majesty’s Revenue and Customs, as much as £25 billion in revenue has been lost since 2000 due to smuggling and cross-border shopping.
Despite the introduction of a smoking ban in pubs, clubs and restaurants in England in July 2007 more than twenty-five per cent of the adult population continue to smoke. Many pubs, clubs and restaurants have invested in comfortable outdoor smoking areas in order to keep as many customers as possible.
As we can see, in order for this economy to produce more ….., it must give up some of the resources it uses to produce cigarettes (point A). If the economy starts producing more cigarettes (represented by points B and C), it would have to divert resources from making …..and, consequently, it will produce less …. than it is producing at point A. As the chart shows, by moving production from point A to B, the economy must decrease …. production by a small amount in comparison to the increase in cigarette output. The nation must decide how to achieve the PPF and which combination to use. If more ….is in demand, the cost of increasing its output is proportional to the cost of decreasing cigarette production. Opportunity cost the value of what is foregone in order to have something else. The opportunity cost of an individual’s decisions, is determined by his or her needs, wants, time and resources (income). This is important to the PPC because a country will decide how to best allocate its resources according to its opportunity cost.
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