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Smoking & booze policy proposals

The proposals for increasing the tax on cigarettes by 17.5 cents per stick and for introducing a minimum price on booze are worthy of analysis.   Proposals are also developed for dealing with obesity but I will not discuss those here.

The report by the National Preventative Health Strategy is here.

Let me do some rough back-of-envelope calculations that follow an earlier approach.

The current tax on a stick of tobacco is 24.3 cents or $4-86 on a packet of 20 so that a 17.5 cent hike would raise this to 41.8 cents per packet so, on a packet of 20, the tax take would rise to $8-36 a 72% increase or about a 35% increase in the cost of a packet of cigarettes.  Cigarette price elasticities  of demand are around -0.25 to -0.5 so such a price hike would reduce consumption by between 8.75 and 17.5%.  Quit elasticities (the percentage of those who quit smoking altogether for a given percentage change in price) are probably around half the demand elasticities so that of Australia’s 2.8 million smokers between 122,000 and 245,000 would quit due to this tax.  If I had to guess I would suppose the number of quits would be close to the upper end of this range as it is a large price increase and demand elasticities are likely, if anything, to be high.  

This is a considerable gain in terms of reduced health costs. About half of smokers face a death that is directly attributable to their habit.   As I set out in the earlier study one seeks quits rather than smoking intensity reductions since the latter are less effective in reducing health risks – it is the compensation phenomenon – people ‘smoke harder’ to get the same nicotine levels.  In addition ex smokers face a much higher risk of lung cancer than those who have never smoked so that overall health benefits are difficult to compute.   But the gains are obvious.

Setting a minimum price on booze was originally to be studied by NCETA and I commented on that then.  The proposal was subsequently revived for discussion by PM Brown in the US and again I commented.  The proposal is a rough attempt to implement volumetric pricing – pricing booze on the basis of ethyl alcohol content.  The idea is to force inexpensive booze that contains much ethyl alcohol to be sold at a large price.  Volumetric pricing is a better approach since then a hefty tax is placed on the inexpensive alcohol and this tax accrues to the government not to the liquor producers.

A minimum price tends to increase the price of alcohol overall.  Suppose, for simplicity, that wines fall into two categories $10 (cheap) and $20 (pricey) with equal alcohol content and a regulator sets a minimum price of $20 on all the cheap wine.  Then cheap wine consumption will fall a bit but there will be a switch also into pricey wines by those who previously drank the cheap stuff.  This shift in demand will raise the prices of the pricey wines.  Regretably however there will be a shift into easily produced home brews and petroleum products – this will be a very dangerous substitution that is already occurring.

Economists don’t like minimum price regulations for ordinary sorts of goods because they impose deadweight losses.  This case is valid here too but the objective is to re3duce smoking and problem drinking not to maximise the social surplus delivered in these markets.  

The argument put in The Australian by Adam Cresswell that these moves are regressive is trotted out every time a price increase on smokes and booze is proposed.  It is rebutted each time it pops up but always rebounds. Poor people do tend to be smokers and to drink a lot so the impact of these individual proposals are regressive  but the tax-transfer system should be judged by its overall impact not that of individual charges. Revenues gained from such things as cigarette taxes can even be redistributed back to the poor if this is sought. And poor people gain in any event from these types of policies by having lower incidence of cirrhosis, lung cancer and emphysema.

3 comments to Smoking & booze policy proposals

  • MAGB

    One of the reasons this needs to be done carefully is that a black market can emerge. It is called “chop-chop” locally and my local milk bar owner said he had been offered it regularly a couple of years ago.

    You also need a comprehensive campaign, or some people with dependency will turn to booze or illicit drugs.

    It is a complex matter and we need to constantly monitor experience with the various initiatives around the world.

  • hc

    MAGB, I discussed chop chop here. That the production of tobacco in Australia will cease reduces the likelihood of a serious switch to chop chop. Booze or other illicits will not substitute for a nicotine addiction.

  • I’ve been a smoker for the past 30 years so obviously I’m really worried about this too. But I switched over to new, healthy cigarettes recently and now my lungs are on the mend. Follow me at!

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