Importance of elasticity
The importance of elasticity of demand for the purpose of attaining social benefit is the best possible means. For any government in order to reduce the use of abusive products this is the perfect tool. From social point of view the demand of something that can harm the society should undergo strict addition of taxes so that the user cannot afford it and eventually the demand will reduce.
The basic concept of this paper is to examine the importance of the elasticity of demand by means of government decision to impose a specific tax on the buyers of cigarettes. The approach forwards a structure under which the demands for cigarettes undergo changes, by the imposition of specific taxes over them. It is the process under which it will be checked whether preference of having a cigarette diminishes due to the increase in cost. The paper will focus over the all those conditions that are directly or indirectly related to this elasticity.
Elasticity in Demand
The fluctuation in the demand for a product due to the increase in its price has been identified as Price elasticity of demand or ‘PED'. This is a status that is very much responsiveness of the total quantity of product demanded, in proportion to the change in the determined price of the goods or service. There are some products that remain under severe demands even after increase in its price (Mankiw and Taylor, 2006). As for instance the demand for drinking water remains static in spite of its rise in price. However, according to Begg, Fischer and Dornbusch (2008), there are some products whose demands diminish or increases with the rise and fall of its price. These kinds of products are subject to elasticity in demand.
Increase in demand of cigarettes
The act of cigarette consumption has been discovered to have negative impact over the structure of price. As per the estimated price elasticity forwarded by Baltagi and Goel (1987), and Peterson et al., (1992) the aggregated data of consuming cigarettes varies from ‘-0.14' to ‘-1.23'. However in most cases it is always very narrower in its range, that is from ‘-0.3' to ‘-0.5'. This is a result that has been derived in developed countries like UK. It has been marked that in spite of the increase in the price the demands for cigarettes remains static, though fluctuates for some few initial days. According to Warner (1990) the price responsiveness hardly makes a difference in really developed countries. It has been established by this scholar that the price-consumption relationship with the consumption of cigarettes remains same in developed countries and there is hardly any mark of decrease in the range of its state. With the increase in income the price of cigarettes hardly can bring in any difference to the level of consumption.
In this respect the research led by Tauras and Chaloupka (1998) speculated the consumption of cigarettes among the teenagers and the adults. The assessments showed that in UK itself the teenagers are little influenced by the rise in price, but for the adults the habit and the urge remains same and they are quite comfortable with whatever the price the government fixes. Addition of specific taxes actually does not bring and hold in them. It is such an addiction that it increases with age and thus for the adults it becomes integral to their day to day life. As for the teenagers since they do not earn the increase in price makes a great difference in them. However they initially could not afford to have it, however with the passes of time, they somehow manages with the money and get hold of the addiction.
By speculating these research results, the importance of increase in the price of cigarettes can be assessed in terms of the elasticity of price only for the teenagers. Though it too makes a difference yet has got no difference with the adults. However, if the target is long term then the application of elasticity of demand is very appropriate. This is because by this application there will a restriction for consumption of cigarettes among the teenagers and if they do not pick up one, then there are fewer possibilities that they will get addicted later. This is thus well equipped with futuristic approach in favour of the society.
Participation of Government by increasing Tax
Increasing the specific tax over cigarettes has been advocated with the hope to get a diminished state in its demands. The price has been increased with the additional tax and the motive for the same is to bring adequate fall in its use among the people of UK. However even the government knows that the effect of this price hike going to be minimal, yet there are hopes for an improved result. The demand for cigarettes if very much inelastic and continues getting sold at an equal rate. The addiction of cigarettes is bad and it has been categorised in the section for demerit goods being an addiction and cause to innumerable diseases, for which the government is trying to restrict its use. Being a demerit goods, cigarettes have the capability of making its consumer underestimate the rising price. Even if the price rises, the consumer continues its consumption and ignores the strategies adopted by government for its eradication. This is the reason that the government of UK, added specific tax to cigarettes. It is an additional tax that has increases the price much more that the consumer can expect it to be.
As estimated by NHS, the rate of passive smoking has increased up to £1.5billion. This increases the social cost that is comparatively greater than the private cost. This proves that if the social cost is greater than the actual present price, then the level of social efficiency can be further increased by means of making the smokers pay true social cost. It is this social cost that has been added to the price of cigarettes as a kind of penalty to all those people who are consuming it.
The following diagram shows the elasticity of demand of cigarette in response to the addition of specific tax led by the government. The difference can be marked by the prices marked as P1, P2 and P3. The elasticity of demand for cigarettes can be estimated through the difference that lies in P3 and P1. Though the difference grows in a slower pace, yet it makes an impact in the long run and that is how the use and consumption gets restricted to a great extent in UK.
As shown in the diagram, the X axis is for quantity and the Y axis is for Price. It is here that P is for price, Q is for quantity, D is for demand and S is for supply. Increase in the price lowers the consumption quantity and vice versa. It can be well marked that it is through tax that there is a visible shift in the supply curve and it moves towards left. This is causing a consecutive fall in the range of demand of cigarettes. This is a well bases socially efficient structure. The reason is that, it is here that the Qse shows SMC=SMB. By adding the specific tax the government can well restrict the use of cigarette in the society. The demands will decrease further as there will be no option left for the consumer.
It can be concluded that even if the smoker is also ready to pay all kinds of taxes and accepts the price hike of £7bill, he has to compromise the amount in his lifestyle. Though the smoker can afford the amount, yet there will be vast variation among the teenagers and the adults. People who are earning good may not quit smoking, but those teenagers who are yet to get an income source have to give up this addiction. There will be a definite elasticity over the demand of the cigarettes as per the increase in its price. As they skip smoking there will be very minimal chance of holding it as they grow adult. Since smoking get into a person especially at teenager. By increase in its price the government is actually preventing the upcoming generation to get into its hold. It will create elasticity in the demand and the demand will eventually diminish with the increase in price.
The importance of elasticity of demand maintained through rise in price is thus very appropriate in making the society free of abusive products, by adding specific taxes the government can well raise its price and can make it unaffordable. As such consumptions of death threatening products like cigarettes can be handled well through the formulation of elasticity of demand in proportionate to prise determined y the government.
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