Designed To Reduce The Level Of Smoking In The Community The Move Generated A Large Amount Of Discussion

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TOC o “1-3” h z u HYPERLINK l “_Toc377396890” In 2012 the Commonwealth government of Australia introduced plain packaging to cigarettes. Designed to reduce the level of smoking in the community the move generated a large amount of discussion. Using basic economic principles explain why or why not such a policy might be effective. What might be the economic rationale for such a policy? Are there alternative polices that could be put in place to reduce the level of smoking in the community? PAGEREF _Toc377396890 h 1

In 2012 the Commonwealth government of Australia introduced plain packaging to cigarettes. Designed to reduce the level of smoking in the community the move generated a large amount of discussion. Using basic economic principles explain why or why not such a policy might be effective. What might be the economic rationale for such a policy? Are there alternative polices that could be put in place to reduce the level of smoking in the community?Packaging is the only thing that sets similar products aside because it allows for differentiation in colour, brand and design (Case, 1999). Attractive packages lure in new consumers and it becomes their preferred brand. Plain packaging policy in Australia means that all cigarette packs must have the same dark park with just the name and the health warning (Clarke, 2012).

Research conducted on the effectiveness of the policy shows that it is bound to work, but in the long run. This is because it will be coupled together with other means of controlling cigarettes, for instance an increase in the tax rate that is charged on the cigarettes. The fact that the cigarette industry is a typical monopolistic market structure means that an increase in tax is shared by both the consumer and producer.

This means that the price of cigarettes will increase while the cost of producing it goes up. Cigarettes are normal commodities and this means that the response by the consumer after an increase in price is to decrease the quantity consumes, while on the supply side an increase in the cost of production of a normal good leads to a decrease in the quantity produced.

This confirms that the assumption made in the Keynesian theory of supply and demand is true, that in the long run only the fiscal policies can work to control an economy. Increase in the tax rate decreases the consumption and production of cigarettes (O’Sullivan, 2003).

Over the last ten years, the manufacturers of cigarettes have known that there is no real difference between one brand and the other in terms of content, the difference is the packaging, the box (Clarke, 2012).. According to a survey done in 2012 December by the University of Sydney, most smokers say that plain packaged cigarette does not taste nor feel as good as the branded and well packed cigarettes. When it comes to most retailers, due to similarity in packaging they will stock a limited volume as compared to when there were differences in packaging. This means the volume of cigarettes available to consumers will b limited.

The government is also dedicated $85 million in marketing campaigns that is aimed at mobilizing people against the use of cigarettes. $27.8 million has been set aside also to create awareness on the health implications of smoking. This will affect the publicity of cigarettes and ruin the PR established over the years.

According to a survey conducted in 2010, the number of new smokers increased by 50,000 per year and 87% of this number are teenagers. This means that there will be a decrease in the new clients that are usually planned for by the tobacco companies.

As a defence mechanism, when similar products are not allowed to differentiate their products by packaging, labelling and branding. The firms usually choose to come together and form a cartel or merge to form a single firm. This will aid by achieving the required economies of scale because the production will be in bigger volumes. When the industry becomes a monopoly, and in the current situation, advertisement and publicity is negative, the one thing that can be changed is the price. This is because whether the price is low or not sales will still decrease due to the negative publicity. However the economies of scale will still ensure that there is enough profit to keep running and supplying to the smaller percentage of consumers.

D1 S2S1

D2

P2

P1

Q2 Q1

As depicted from the above graph, a decrease in the quantity demanded will shift the demand curve from D1 –D2, the supply will also decrease in order to cater only for the quantity demanded, the supply decreases and this makes the supply curve to shift from S1- S2 (Case, 1999). This will lead to an increase in the prices so as to maintain profits and this will decrease the quantity of cigarettes required by the public and the ultimate goal of the policy will be achieved.

Increase in quotas should be imposed on any tobacco imports made in the country. This will make imports expensive and decrease the effect of the international community taking advantage of the countries decrease in volume produced (Kaliski, 2000). A new tariff should be also imposed on any imports as well. In case there is the defence mechanism whereby the firms form a monopoly then the government is allowed to control monopolies by dictating the quantity it is allowed to produce.

References

Clarke, H. and D. Prentice (2012), ‘Will plain packaging reduce cigarette consumption?’, Economic Papers 31(3), PP. 303-18.

Case Karl et al. (1999), Principles of Economics 5th edition, Prentice Press Hall, Washington DC

O’Sullivan, Arthur, Steven M. Sheffrin, (2003), Economic Principles in Action; Effects of Fiscal Policy, Pearson Prentice Hall, New Jersey.

Kaliski, B. (2001), Encyclopaedia of Business and its Environment 2nd Edition, Macmillan, New York