4.

0 NEGATIVE EXTERNALITY: ISSUE OF CONSUMPTION OF CIGARETTES

From Figure 1 it shows that the Marginal Social Benefits (MSB) curve is smaller than the

Marginal Private Benefits (MPB) curve, thus the negative externalities affect the private

utility significantly by diminishing it. Addiction to the cigarettes will force consumers buy

cigarettes at the equilibrium level MPB=MSC as the demand for cigarettes is non-elastic. The

consumers are will not think about the negative effects that the consumption will have on

third parties, they will only think about the benefits/costs to them. In the case of smoking, the

smokers will not think about the effect of passive smoking on children which can cause

asthma, but of the benefits to themselves. This means consumers will maximise their utility

and consume at the quantity of Q2, where the marginal social costs equal the marginal private

benefits, rather than the socially desirable level of Q1, where the marginal social benefits
equal the marginal social costs. This results in a welfare loss (deadweight loss) to society, as

shown by the blue, shaded area. The welfare loss (deadweight loss) to society as a result of

smokers smoking as much as they please without paying for the costs they inflict on the rest

of us.

Figure 2 shows the effects of negative externality when the government impose tax in

cigarettes market. The origin equilibrium point at quantity of cigarettes Q2 and prices of

cigarettes P2. When the tax was imposed by the government, the supply curve shifts upward

to the increased level of supply + tax. Assume that Marginal Social Costs (MSC) = supply,

the most desirable situation would imply value of the tax equal to the negative externality.

With consecutive actions of government intervention proportional relation may be achieved.

This led to the lowered demand and the consumption of cigarettes may decrease effectively to

the Q1. It is worthy of mentioning that it returned to the initial equilibrium – but at a higher
price (P3). Government will be also be able to increase the budget revenues. This situation,

on the other hand, may lead to the enlargement of the black market and crime. Prices of

cigarettes will increase; therefore regular smokers will spent more money to fulfil their desire

of smoking. Those who have lower income or less available funds for remain on living, thus

their living standards have to decrease. In a long-run, it may be harmful to the productivity of

people. It is because cigarettes are a inelastic-demand product and the smokers tend to smoke

at any costs is it plausible that the decrease of the number of smokers may be unsatisfactory

from the government perspective.

 The Relationship Between Cigarette Prices, Consumption and Income in Turkey

Turkey is one of the largest tobacco consumers. Among OECD countries, Greece and Turkey

carry the second-highest smoking rates, with more than 27 percent of persons over fifteen

years of age declaring themselves to be daily smokers (Tobacco Taxation in Turkey – An

Overview of Policy Measures and Results, 2017).

Figure 3: Cigarette prices, consumption and income in Turkey 1995 – 2008

Based on figure 3 shows the relationship between cigarette prices, consumption and income

in Turkey from 1995 to 2008. As we can see on the graph, even though there is increment in

the cigarette prices but the consumption still remains the same. This is due to increment of

cigarette prices parallel with the increment of income such as in year 1995 to 1997. In 1999

to 2000 the prices of cigarettes are slightly decrease while the income has a high decrement.

This changes only give small effect on the consumption of cigarettes. This due to the

inelasticity demand of cigarettes. Based on the graph starting from 2004 there was reduction

of cigarettes consumption due to the tax implement by Turkey’s government. Turkey’s

government increased tobacco tax revenue and lowered tobacco consumption by increasing

tobacco tax rates significantly between 2003 and 2013. (Tobacco Taxation in Turkey – An

Overview of Policy Measures and Results, 2017)