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The product chosen is refrigerator. The demand for this product is elastic as it is a durable good. The spending of refrigerator can be postponed and used back the old one until the price is more affordable. Besides, the supply of refrigerator is inelastic due to limited resources in the short run. There is at least one fixed factors of production and thus the firm can't increase its capacity in the short run.
Burden of the Tax
Overall Social Welfare
Based on the diagram above, before the government imposes a tax on consumption of refrigerator, the equilibrium price and quantity for refrigerator are found at the intersection of the supply and demand curves. The price is P1 and the quantity sold is Q1. As the demand curve reflects buyers' willingness to pay, consumer surplus is the area between the demand curve and the price, A+B+C. Similarly, the supply curve reflects sellers' costs, producer surplus is the area between the supply curve and the price, D+E+F. In this case, the burden of tax and government revenue is zero. This is because the cost of getting refrigerator has reduced as there is no tax to pay for it now, so in comparison the producer and consumer will gain more benefits.
Understandably, when the government imposes a tax on the consumption of refrigerator, it will cause a fall in the demand and the demand curve shift down from D1 to D2. The consumer surplus of refrigerator which means the differences between the willingness to pay and the cost of getting the refrigerator is represented as A. The producer surplus is the net profit of seller obtained after deducting the cost of producing the refrigerator is represented as F. While the government tax revenue is B+D, also the deadweight loss is C+E. Mankiw (2009) stated that imposing a tax will cause a deadweight loss in the market as it will reduce the incentive of seller and buyer to produce and consume, hence there will have a fall in total surplus of market size. Other than that, the supplier bears the higher burden of tax as the demand is relatively price elastic. The consumer is responsive to price changes, therefore the supplier will not pass the bigger burden of tax to the customer.
In conclusion, the overall social welfare has reduced which is the proportion of C+E. This is because the losses to buyers and sellers from a tax exceed the revenue raised by the government.
Negative externalities occur when production or consumption impose external costs on third parties outside of the market for which no appropriate compensation is paid. (Geoff Riley, 2006). Negative externalities cause the socially optimal quantity in a market to be less than the equilibrium quantity. The diagram 2 shows the social cost of producing cigarette. The social cost curve is above the supply curve because it takes into account the external costs imposed on society by cigarette producers. The difference between these two curves reflects the cost of pollution emitted. Therefore, the optimal quantity is smaller than the equilibrium quantity. This result is that a negative consumption externality causes cigarette to be overproduced. (Mankiw, 2009).
The chosen negative externality is cigarette. Cigarette smoking has a lot of negative consumption externalities. Consumption externalities are generated and received in consumption. (Geoff Riley, 2006).The harmful effect of cigarette is that smoking is bad for health. It can cause a number of severe health problems. Those people who smoke cigarettes, possess a very high chances of suffering from lung cancer, in comparison to those who are nonsmokers. Other critical health problems which can be triggered by cigarette smoking are lung, throat and oral cancer, as well as various other types of illnesses like emphysema, smoker's cough, loss of endurance and stamina. (Ronny Swetrov, 2011).
Researches have confirmed the fact that in reality, a single cigarette stick contains nearly 4,000 different types of chemicals and among them, 60 types of chemicals have been identified to cause cancer. (Ronny Swetrov, 2011). One of the main dangers of smoking is due to nicotine. Nicotine is a chemical found naturally in tobacco, it has no odor and no color. However, it is both physically and psychologically addictive as well as poisonous, it causes those who use it to want to smoke one cigarette after another. Nicotine enters the body as tiny droplets on particles of tar in cigarette smoke. After smoke is inhaled into the lungs, the drug passes quickly into the bloodstream, reaching the brain within about 10 seconds. In another 5 to 10 seconds, the nicotine has been spread to all parts of the body. Cigarette smoking also significantly raises both the heartbeat rate and blood pressure level which happens mainly due to the presence of nicotine, it will stimulate the central nervous system. The smoker will quickly feel more alert and relaxed. However, in less than 30 minutes, about half of the nicotine has left the bloodstream, the smoker starts feeling less alert and more edgy. Therefore, they will crave for another cigarette to get a new "hit" of nicotine. Over time, the smoker starts needing more cigarettes throughout the day to satisfy the craving. (Terry Martin, 2008).
Moreover, the smoke emitted by cigarettes consists of deadly, carcinogenic compounds like radon and radium, which are found to be responsible for causing lung cancer. In addition, carbon monoxide binds to hemoglobin in red blood cells, it preventing cells from carrying a full load of oxygen. (Terry Martin, 2008). Hence, smoking will reduces the oxygen amount that travels to the brain. This may leads to blood coagulation, which enhances the possibility of blood clots. Excessive clotting of blood will lead to different cardiovascular diseases like strokes and heart attacks. (Ronny Swetorv, 2011). Other than that, it is also dangerous for pregnant women, since passive smoking can induce miscarriages. If a woman smokes during her pregnancy, there is a higher risk for her child getting exposed to the adverse effects of smoking like low birth weight, prematurity and spontaneous abortion.
Passive smoking or second hand smoke occurs when the exhaled smoke from one person's cigarette is inhaled by other people. Non-smokers exposed to second hand smoke are at greater risk for many of the health problems associated with direct smoking. According to Len Johnson (2005), non-smokers living with smokers have about 25 percent increase in risk of death from heart attack and also more likely to suffer a stroke. Based on the study in U.S. Department of Health and Human Services, (2004), founded that exposure to second hand smoke increases the risk of heart diseases among non-smokers by as much as 60 percent. Besides, smoking gives a higher risk of starting a fire. Many fires had been discovered to originate from a cigarette left lit. It also leads to air pollution due to the constant release of carbon monoxide in the proximate vicinity.
In conclusion, the negative consumption externalities are very harmful to the society. The harmful effects of cigarettes are smoking will cause smokers' health problems, the burden cost of family support increase and they are high risk to the non-smokers due to second hand smoke.