California's Cigarette Tax: The Relationship between Price and Externalities (Essay Sample)

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California’s Cigarette Tax
The proposal to impose additional sin tax in California elicits varied reactions from health groups, the tobacco industry, and the state government. Actually, health groups support the additional tax on cigarettes, which is an indication of an endeavor to discourage smoking and sponsor health research and prevention programs. Equally, the state government supports the tax due to the fact that it provides an additional and sustainable revenue stream. Conversely, the tobacco manufacturers oppose the move due to the very simple reason that it directly affects sales and profits. Above all, the plan will cause direct and positive impact on productivity across the state.
Using Incidence of tax to Address Negative Externalities
Precisely, price elasticity can be thought of be the responsiveness of quantity of a good demanded due to a given change in price. Obviously, price change affects the quantity demanded of a product; consequently, it is imperative to understand the price elasticity of demand of cigarettes to decipher impact of a decision to enforce additional taxes. Price elasticity relates to the incidence of tax and makes it possible to use tax to address negative externalities related to tobacco products. The following diagram illustrates the relationship between price elasticity and use of tax to correct negative externalities.
The Relationship between Price and Externalities
 D1 S2 - SMC
P2 f S1 - PMC
P1 e
 D1 –PMB-SMB
q2 q1
From the diagram, S1 represents the original supply curve and private marginal cost (PMC). Private marginal cost refers to the extra cost that a smoker incurs from purchasing an extra pack of cigarette. At point “e”, the smoker’s private marginal costs as well as private marginal benefits (PMBs) are at equilibrium. Here, a smoker derives maximum utility from the cigarettes. However, he or she does not cater for tobacco-related costs, such premature deaths and health fees from tobacco-related diseases. Therefore, the incidence of tax shifts prices to P2 that corresponds to the social marginal cost. At point “f”, the smoker is in a position to cater for the extra costs through taxation.
Clearly, the additional tax on cigarettes has short-term and long-term implications. The immediate impact of the tax is an increase in the price of cigarettes. Of course, this reduces the purchasing power of smokers, which forces them to reduce their demand for cigarettes.
On the contrary, one of the possible long-term implications of the additional taxes in California is increased life expectancy rates. For example, the state recorded an estimated 35,000 smoking-related deaths. In this context, supporters of the additional tax on cigarettes argue that a price increase from the taxes would save up to 100,000 lives annually. In addition, the state would save an average of 18.1 billion dollars, which is spent on direct and indirect costs of pre-mature deaths among smokers. In fact, pre-mature deaths rob the state it’s most productive segment of the population: young adults. Without a doubt, this group contributes to a relatively significant share of economic development at the statewide and nationwide levels. While the proponents of the proposed amendment base their argument on the costs of t...