IB Economics Internal assessment summary portfolio cover sheet

School code 002223

Name of school The Sultans School

Candidate number 0028

Candidate name Momina Amjad

Candidate name Momina Amjad

Candidate number 002223-0028

Teacher Paul Bird

Title of the article How Obamas tobacco tax would drive down smoking rates

Source of article The Washington Post

Date the article was published 11th April 2013

Date the commentary was written 9th May 2013

Word count (750 words maximum) 744

Section of the syllabus Please tick the one that is most relevant

Section 1: Microeconomics

Section 2: Macroeconomics

Section 3: International economics

Section 4: Development economics

http://www.washingtonpost.com/blogs/wonkblog/wp/2013/04/11/how-obamas-tobacco-tax-would-drive-down-smoking-rates/ Date Accessed: 9th May 2013

How Obamas tobacco tax would drive down smoking rates Posted by Sarah Kliff on April 11, 2013 at 9:34 am

President Obamas proposal to nearly double the federal tobacco tax would help fund a

universal pre-K program. And, if history is any guide, it would likely have a marked impact

on driving down the countrys smoking rates.

Increasing the price of tobacco is the single most effective way to discourage kids from

smoking, CDC director Tom Frieden told reporters Tuesday afternoon. We estimate this

would result in at least 230,000 fewer kids smoking than would have smoked if the tobacco

tax does not go into effect.

Researchers have conducted over 100 studies that have clearly and consistently

demonstrated that higher cigarette and other tobacco product prices reduce tobacco use,

Frank Chaloupka, a professor at the University of Illinois in Chicago, writes. While tobacco

is an addictive substance, demand tends to be surprisingly elastic: Price increases have

reliably shown to decrease cigarette purchases.

The Congressional Budget Office recently looked at what would happen if the country

implemented a 50-cent per pack tax on cigarettes. It estimates, given the research we have

on tobacco taxes, that the price increase would lead to 1.4 million fewer smokers by 2021.

http://www.washingtonpost.com/blogs/wonkblog/wp/2013/04/11/how-obamas-tobacco-tax-would-drive-down-smoking-rates/ Date Accessed: 9th May 2013

Many of those gains would be concentrated among younger Americans, who would take up

smoking at lower rates:

A few years after the hypothetical tax increase took effect, the number of 12- to 17-year-olds

who smoked cigarettes would be about 5 percent lower than it would be otherwise, the

number of 18-year-old smokers would be 4.5 percent lower, the number of 19- to 39-year-

old smokers would be almost 4 percent lower, and the number of smokers age 40 or older

would be about 1.5 percent lower.

The CBO data suggests that a cigarette tax is more successful at reducing tobacco use among

shorter-term smokers, vs. older Americans who may have been smokers for a longer period

of time.

Even among those who dont fully quit, tobacco taxes do appear to effect the intensity of

smoking. A 2012 study in the journal Tobacco Control interviewed thousands of smokers over a

time period where states increased their tobacco taxes. It found that the most intense

smokers those who smoked 40 or more cigarettes per day saw the steepest decline in

cigarette consumption.

The dramatic reductions in daily smoking might be driven, at least in part, by heavier

smokers desire to reduce the number of cigarettes they smoke per day, lead study author

Patricia A Cavazos-Rehg writes. This could be because of their comorbid health problems

and/or advice from inuential persons (eg, doctors/friends/family) to try to quit and/or

reduce smoking.

Microeconomics IA Candidate Number: 002223-0028

1

President Barack Obama plans to nearly double the tax on tobacco in America, aiming to reduce

cigarette consumption and use the revenue gained to fund preschool education across America.

Cigarette smoking is a negative externality of consumption; an economic activity which imposes

costs on third parties for which the consumer doesnt pay. In this case, those are passive smoking,

diseases and healthcare costs on the community. Negative externalities are one of the sources

of market failure because they are caused due to overprovision of de-merit goods, i.e. goods that

are bad for not only the consumer but for the society as a whole.

The diagram below represents a model for negative externalities. The external costs of smoking

are ignored by the smoker, therefore social benefits are less than private benefits and the MSB

curve lies below the MPB curve. The socially optimal amount of cigarette consumption is at

intersection A, where MSC=MSB and the market is in equilibrium. However, a larger quantity Q1

is consumed, leading to a welfare loss represented by the grey triangle.

One of the ways to cut down negative externalities is by imposing indirect taxes, which in this

case can also be called Pigovian taxes. The diagram overleaf explains how Obama

administrations decision to double tobacco tax can reduce its consumption.

(Packs)

Pri

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($

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Diagram 1: Market of cigarettes in USA indicating negative

externality of consumption

Microeconomics IA Candidate Number: 002223-0028

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Assuming that the current tax raises the price to P2 and brings consumption back to the socially

efficient Q*, doubling the tax at P3 would decrease consumption even more to Q2, at least in

theory and according to this article.

Taxing tobacco is an easy way for governments to make revenue because it is taxing something

that already has a negative impact on society, which is usually more acceptable than getting

revenue from other kinds of taxation. Obama plans to use the revenue for subsidizing preschool

education; which is a positive externality that creates a good impact on society. Although this

looks great on the surface, there are many problems associated with such a large increase in

tobacco tax.

Unlike the article suggests, the demand for cigarettes is not elastic, especially for the older

generation of smokers who are more addicted to cigarettes. It will be effective in limiting the

number of young smokers (as seen in the statistics in the article) but it will not actually stop

consumption for the majority of smoking population. Moreover, taxes on negative externalities

tend to be regressive- the proportion of income paid in tax falls as income rises. Statistics show

that smoking is more prevalent in lower income groups1 in USA, therefore they pay the majority

1 Goszkowski, R. 2008. Among Americans, Smoking Decreases as Income Increases. [online] Available at: http://www.gallup.com/poll/105550/among-americans-smoking-decreases-income-increases.aspx [Accessed: 09 May 2013]

Pri

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(Packs)

Diagram 2: Taxation for removing the negative externalities of

consumption.

Microeconomics IA Candidate Number: 002223-0028

3

of this tax. A lot of countries tax smokers for healthcare costs society endures, but in America,

healthcare is run by private insurance companies who often charge smokers far more on health

insurance2 and the poor end up paying a double high price, worsening income inequality.

In addition to the above, if the demand of cigarettes in the market is too low due to prices being

really high, it might harm the industry and its employees might lose jobs. There is also a chance

that people start looking for other sources of supply, such as the black market, in which case not

only will people consume more cigarettes, the government will not be able to collect any revenue

from it either. This is the most negative outcome that could come out of heavy taxation.

A different solution to reduce cigarette smoking is to regulate its consumption by designating

non-smoking areas throughout all public places. If people are still caught smoking, they can be

fined. The problem with this solution is that it is hard to monitor all public property and this will

use up a lot of the countrys resources. A long term solution might be possible if the government

spends more money on education and negative advertising so that people stop smoking due to

the awareness of health risks. This causes the MPB curve to shift to the left, getting closer to the

MSB curve hence making the market more socially efficient in the long run.

In the light of these arguments, the present tobacco tax in America seems sufficient if it is

combined with a variety of other possible solutions to reduce tobacco consumption. Doubling

the tobacco tax will be seen by many in Americas harsh political climate as exploitation of the

poor due to the aforementioned reasons. Subsidizing preschool education is a great decision but

it could be financed in a different way.

Word Count: 744

2 Tozzi, J. 2013. Overweight? Smoke? Pay Up for Health Insurance. [online] Available at: http://www.businessweek.com/articles/2013-01-11/overweight-smoke-pay-up [Accessed: 9 May 2013]

Bibliography:

Goszkowski, R. 2008. Among Americans, Smoking Decreases as Income Increases. [online] Available at:

http://www.gallup.com/poll/105550/among-americans-smoking-decreases-income-increases.aspx

[Accessed: 09 May 2013]

Tozzi, J. 2013. Overweight? Smoke? Pay Up for Health Insurance. [online] Available at:

http://www.businessweek.com/articles/2013-01-11/overweight-smoke-pay-up [Accessed: 9 May 2013]