The Fall of Cigarette Prices!

Monitor Sales To Curb Smuggling 

According to News Straight Times an online article was published on the 22nd August 2012 written by Kristy Inus. It states that the price of cigarette prices are expected to be set at a price floor of RM7 and it is stated that all cigarette manufacturers are only allowed to sell their products of 20 sticks in one box and 10 boxes in one carton. The move made, makes it illegal for shop owners to sell their products at a price lower than RM 7. This is part of a new directive issued by the Health Ministry to standardize cigarette packs. The move to standardise the number of sticks per pack was announced last year to strengthen the enforcement of the Tobacco Product Regulation. The price floor is set above the equilibrium price. A price floor is a regulation that makes it illegal to trade at a price lower than the specified level. The move made by the government is in efforts to curb the current problem that is plaguing the nation’s health of lung cancer, heart related ailments and stress. While the Malaysian government recognises the tobacco industry as an important economic earner, it is also one that affects the health of the nation. In this article I would like to agree and disagree based on my economic knowledge.

The part that I would like to agree on the article is as follows. In the economic point of view when the price of an item increases generally the demand for the product will drop. In this case this means that the consumption for cigarettes will drop when the price increases causing low income workers and teenagers to quit the habit. With the new floor price on cigarettes this will influence suppliers to increase their prices, causing quantity demanded to decrease. For the consumers on the other hand, there are no advantages for them. Fewer people will be smoking and second hand smokers will decrease.

Another economic point that can be addressed is the substitution effect. Since cigarettes are an inelastic good there are no close substitutes for it. However by setting the price higher than the equilibrium, the quantity supplied would be higher than the quantity demanded resulting in excess of supply known as surplus.
For cigarette supplier on the other hand their revenues would be greatly increased since cigarettes are an inelastic good making it difficult or impossible for consumers to find an alternative tobacco based product.
Another economic principle that can be stated is the income effect. The income effect is when the price of a good or service relative to income, people cannot afford the things they previously bought, so the quantity demanded of the goods or service decreases. According to the income effect an individual is able to purchase a box of cigarette even with the rise in the prise because of the extra income that is earned.
The side that I would like to disagree on is, in the economic principle of price elasticity of demand, cigarettes are not a habit but more of a fixation. Making consumers not to respond well to the increase in price but carry on with the habit. In addition to the rise in the price it has not deterred consumers to put aside the habit. The implications of the price ceiling causes cigarette companies to increase in revenues and making the citizens spend more.

Another fact that can be seen is that, cigarettes are an inelastic good. This makes a substitute good either illegal or dangerous. Since the rise in price has caused many people not to be able to afford the price it will lead them to purchase contraband cigarette which is smuggled in from neighbouring countries without the payment of required taxes and duties and sold at a much lower price. And in most cases these cigarettes do not have mandatory labelling required such as graphic health warnings. Most of the cigarettes sold illegally are much worst for health.

With all said and done the move by the government to imply the new price ceiling has its positive and negative sides to it. It is to my understanding based on my microeconomics knowledge that all decision made are done for the nation and people. With all said and done, it is the people’s decision to think about lighting up that next cigarette.