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According to the article, University of
Indonesia demanded an increase in the excise tax of tobacco in order to reduce
smoking in the country and to increase the government revenue. The reason they
are dissuading people from smoking tobacco is due to the effect of negative
externalities of consumption as tobacco is an example of demerit goods.Demerit
goods are special class  Market failure describes any situation
where the individual incentives for rational behavior do not lead to rational
outcomes for the group. 1 According to The World Health Organization, the
minimum amount of excise on tobacco is supposed to be 70 percent on retail
price but in Indonesia it is 57 percent of the retail price .


Negative externalities of consumption of

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In a free market consumers will maximize
their private benefit and consume where MSC=MPB . Overconsumption of cigarettes
happens as people are smoking at Q1 cigarettes at a price of  p1 although the efficient output is at Q0 results
in overconsumption of Q1 to Q0 as MSC is greater than MSB, there is a welfare
loss to society and market failure is created. Market failure occurs when
community surplus is not maximized and the socially desirable level of output
is not achieved.2 People who smokes gets private benefits of smoking but it
will create external cost for other people. This will also create discomfort
and the cost to others in the form of lung cancer bronchial illness and astema.


The Indonesian government is trying to reduce
this negative externality buy imposing excised tax on tobacco in order to
reduce consumption. Excise tax refers
to an indirect type of taxation imposed on the manufacture, sale or use
of certain types of goods and products.3 It can be illustrated with the help
of diagram below.


Effect of government’s excise tax on




If the government impose excise tax it will
shift the MSC curve to MSC +tax . This will help in decreasing the consumption
to output Q0 but the consumers have to pay price equal to p2. This will not
only increase the government revenue but also help in reduction of negative
externalities of consumption caused by smoking .


Raising the price of cigarette raise the
government revenue which can be use on other merit goods in the economy such as
building more public transport or health care facility, However there is still one
problem associated with this, although government revenue increases but there
wont be much significant decrease in the demand of cigarettes as demand of
cigarettes is inelastic by nature. And also 
taxes will make cigarette expensive so people might look for other
sources for supply either through smuggling or create another problem like
black marketing.


Imposing excise duty may not be considered as
one of the effective measure as it will create more pressure on purchasing
power of the poor people as articles states that cigarettes is one of the most
consumed product in Indonesia after rice. In other opinions Indonesian
government could use other effective measures like by banning the cigarette
smoking totally or by providing education and awareness among the people
regarding the dangers of smoking. Government can also restrict smoking in
public places and workplace to reduce existences of smoking.









25 Oct. 2017, Study,
25 Oct. 2000,

Staff, Investopedia. “Market Failure.” Investopedia,
10 Apr. 2015,

“Excise Tax.” Investing Answers Building and Protecting
Your Wealth through Education Publisher of The Next Banks That Could Fail,
25 Oct. 2017,

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