According to the article, University ofIndonesia demanded an increase in the excise tax of tobacco in order to reducesmoking in the country and to increase the government revenue. The reason theyare dissuading people from smoking tobacco is due to the effect of negativeexternalities of consumption as tobacco is an example of demerit goods.
Demeritgoods are special class Market failure describes any situationwhere the individual incentives for rational behavior do not lead to rationaloutcomes for the group. 1 According to The World Health Organization, theminimum amount of excise on tobacco is supposed to be 70 percent on retailprice but in Indonesia it is 57 percent of the retail price . Negative externalities of consumption ofcigarettes In a free market consumers will maximizetheir private benefit and consume where MSC=MPB . Overconsumption of cigaretteshappens as people are smoking at Q1 cigarettes at a price of p1 although the efficient output is at Q0 resultsin overconsumption of Q1 to Q0 as MSC is greater than MSB, there is a welfareloss to society and market failure is created. Market failure occurs whencommunity surplus is not maximized and the socially desirable level of outputis not achieved.
2 People who smokes gets private benefits of smoking but itwill create external cost for other people. This will also create discomfortand the cost to others in the form of lung cancer bronchial illness and astema.1The Indonesian government is trying to reducethis negative externality buy imposing excised tax on tobacco in order toreduce consumption. Excise tax refersto an indirect type of taxation imposed on the manufacture, sale or useof certain types of goods and products.3 It can be illustrated with the helpof diagram below. Effect of government’s excise tax oncigarettes If the government impose excise tax it willshift the MSC curve to MSC +tax . This will help in decreasing the consumptionto output Q0 but the consumers have to pay price equal to p2. This will notonly increase the government revenue but also help in reduction of negativeexternalities of consumption caused by smoking .
Raising the price of cigarette raise thegovernment revenue which can be use on other merit goods in the economy such asbuilding more public transport or health care facility, However there is still oneproblem associated with this, although government revenue increases but therewont be much significant decrease in the demand of cigarettes as demand ofcigarettes is inelastic by nature. And also taxes will make cigarette expensive so people might look for othersources for supply either through smuggling or create another problem likeblack marketing. Imposing excise duty may not be considered asone of the effective measure as it will create more pressure on purchasingpower of the poor people as articles states that cigarettes is one of the mostconsumed product in Indonesia after rice. In other opinions Indonesiangovernment could use other effective measures like by banning the cigarettesmoking totally or by providing education and awareness among the peopleregarding the dangers of smoking. Government can also restrict smoking inpublic places and workplace to reduce existences of smoking. Wordcount:571 Bibliography1. 25 Oct.
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