Question

Some have argued that higher cigarette prices do not deter smoking. While there are many arguments both for and against this view, some find the following argument to be the most persuasive of all: "The laws of supply and demand indicate that higher prices are ineffective in reducing smoking. In particular, higher cigarette prices will reduce the demand for cigarettes. This reduction in demand will push the equilibrium price back down to its original level. Since the equilibrium price will remain unchanged, smokers will consume the same number of cigarettes." Do you agree or disagree with this view? Explain

Answer 1

Answer:

The tobacco industry is not classically influenced by demand and supply, as it is always a sensitive topic for government policies and economics in general. Since tobacco products (cigarettes) are not an ordinary product, but impose a threat to health instead, their prices are mostly influenced by government or regulatory body decision, rather than general market rules.

So, if cigarette prices become higher (as an aftermath of a regulatory body decision), they will remain that way, no matter if the demand decreases.

Answer 2

The correct statement will be that the prices of cigarettes will not affect the smoking habits of a person, as the person derives pleasure from such smoking.

The example given above is a classic situation to the exception to the law of diminishing marginal utility, where the law does not apply, as the smoker will derive additional utility from each unit.

Exceptions to the law of demand

• A smoker's habit of smoking will not get affected by the price of cigarettes, as he derives more and more satisfaction with each unit of cigarette consumed by such person,

• This is an exception to the law of demand that if the prices of a commodity change, the demand will also change. Similar law applies to or an alcoholic.

Hence, we can derive that a person who smokes cigarettes will not change his number of units of cigarettes smoked with a change in the price of cigarettes.

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