Microeconomics: Article Summary The purpose of this paper is to provide a brief summary of an article relating to any issue of microeconomics. Secondly this paper will provide a brief discussion of some microeconomic terms and theories that apply to the subject of the article. The Article that will be discussed is titled “Cigarette Tax Clouds Boosts Among States. ” as written by Betsy Mckay and as it appeared in the Wall Street Journal on February 9th 2009. The article first identifies that there has recently been a hefty increase in the federal taxes on cigarettes to help fund a chldren’s health-insurance program, however it was also implied that at least 16 states are weighing proposals for tobacco taxes to fill state level budgetary deficits.
The article then goes on to argue that these sorts of taxes are often referred to as ‘sin taxes’ typically targeting alcohol, tobacco and gambling. In the case of tobacco it has become a frequent target insofar as there is a concern regarding health care costs and the safety of minors. At the time of publication the average price for a pack of cigarettes was $4.32 with $1.19 being state tax and $1.01 being a federal tax. According to the article the increase in cigarette prices is also a means to reduce smoking rates amongst ‘price sensitive teens’.
However, even with steady increases in tobacco prices, the declines in overall smoking rates have stalled amongst youths and adults. The article went on to further estimate that a 10% increase in the price of tobacco reduces consumption by approximately 4%. It should be noted that even though taxes reduce the amount of tobacco sold it is estimated that the states with tobacco taxes have still recognized increases in tobacco tax revenue.
With a higher federal level of taxes it is expected that states will also increase their taxes to offset the decline in overall tobacco sales. However it is likely that the increase in tobacco taxes will also lead to the loss of 117,000 jobs and declining sales in regular family run businesses that sell tobacco. Several microeconomic theories apply to this article such as perfectly competitive markets, price inelasticity, cross price elasticity of demand, opportunity costs and externalities. Whilst it is the case that much of the article has macroeconomic implications it is the case that there are some serious microeconomic issues at hand.
The first microeconomic issue that leaps out is that the market is nearly perfectly competitive insofar as many buyers and sellers and no major cigarette producer is able to significantly undercut the price of goods. The second major microeconomic issue that jumps out is price inelasticity insofar as the article indicates that when prices go up by 10% one can expect only a 4% reduction in consumption.
The logic behind this is probably owing to the fact that tobacco is highly addictive and some people would choose to reduce payments in other sources to feed their habit which brings us to the third microeconomic principle which is the cross price elasticity of demand. With more people choosing to smoke over purchasing other goods the opportunity cost would be the cost of tobacco in relation to the next alternative forgone (Such as food, healthcare, or savings). The fourth major microeconomic issue at hand in the presence of externalities.
Anybody familiar with the tobacco market understands that there is significant government regulation which uses tobacco tax dollars to fund anti tobacco programs that attempt to persuade people from smoking.