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.

Short answer

Smoking is a habitual behavior of consumers. Hence, it is agreeable that the law of demand and supply will not affect the number of cigarettes consumed.

Step-by-step solution

Term Description: 

Law of Demand: The law of demand states that as the price of an economic good rises, the demand for those goods decreases.

Law of Supply: The law of supply states that as the price of an economic good goes up, the quantity of that good supplied will rise as well.

Detailed Understanding of the cigarette market:

The cigarette market is considered a competitive market where various brands compete against each other for their respective market share. Since everyone knows that smoking is injurious to health, the government might try to regulate smoking by increasing the price of cigarettes.

However, cigarette consumption being a behavioral commodity followed by its share being a small percentage of the consumer’s income, its demand is considered inelastic. Thus, though the government might increase the price, the rate at which the demand would be expected to decrease is extremely less.

Nevertheless, if the government successfully reduces the demand to a certain level, the market will again set the price to a low level to bring equilibrium. Such will again increase the demand for cigarettes. Thus, the equilibrium level of consumption of cigarettes will remain unchanged in the economy.