Commentary 1

Title of Article

Spanish anti-smoking bodies press for tax on both

e-liquid volume and nicotine

Source of the Article https://ecigintelligence.com/spanish-anti-smoking

-bodies-press-for-taxes-on-e-liquid-volume-and-ni

cotine/https://ecigintelligence.com/spanish-anti-s

moking-bodies-press-for-taxes-on-e-liquid-volum

e-and-nicotine/

Date the Article was Published 28th June 2021

Date the commentary was written 25th October, 2021

Word Count of the Commentary 832

Section of the Syllabus Microeconomics

Key concept Intervention

Article
 Commentary

This article discusses the implementation of indirect taxes on the distribution of nicotine and e-liquid

volume products to reduce consumption of these products for health and well-being purposes, as well as

generating economic returns to improve the Spanish economy.

The consumption of nicotine products, such as cigarettes, and e-liquid volume are an example of a

negative externality of consumption as they impose an involuntary cost that the third party must deal

with. This causes market failure, a failure in allocating resources efficiently, at a social optimum level.

The Spanish anti-smoking organizations have urged the government to incorporate taxing schemes,

35.6% tax rate, in the Tobacco Act of Spain to decrease the consumption of nicotine and e-liquids as well

as to urge the government to gain economic returns, an estimated €35m a year. This could potentially

reduce the budget deficit of Spain as the government has a higher expenditure than tax revenue.

The graph displays that the Marginal Social Benefit (MSB) is below the Marginal Social Cost (MSC), and

the area between the lines depicts the welfare loss or spillover cost, a loss to society, such as pollution,

lung cancer, and other health issues. Q1 is greater than Q-opt, showing that nicotine and e-liquid products

are overproduced and over-consumed, and this excessive supply, production, and consumption of these
products causes significant allocative inefficiency. The imbalance in the market requires the spanish

government to intervene to correct market failure and decrease the consumption of these products,

therefore achieving allocative efficiency, when the most desirable outcome is met without worsening the

situation for society.

As shown above, the imposition of €0.15 tax per ml of e-liquid would shift the supply curve

S=MPC=MSC to MPC + €0.15. This will increase the cost of production and cause a decrease in quantity

supplied, moving from QM to QM1. The price of e-liquid will increase from PM to PM1, therefore

reducing the demand due to higher prices, especially for low-income workers. The increased taxation of

€0.006 per mg for each additional element for nicotine content would cause the current supply curve to

shift from MPC + €0.15 to MPC + €0.156 Tax. This shift would cause a reduction in quantity from QM1

to QM2, and also a hike in prices from PM1 to PM2. This would drastically reduce the negative

externality for society and would lead to a large increase in tax revenues.

Taxing e-liquid and nicotine products is beneficial to the government due to the increase in tax revenue
that could be used for awareness campaigns and education, to further decrease the externality. It is also

helpful in achieving the intent of the non-smoking organizations in improving public health, and creates

stepping stones in implementing an “anti-smoking law” that the Ministry of Health is vouching for.

Although significantly altered, there is still welfare loss to society due to other factors in the imposition of

indirect taxes. Negative externalities are extremely hard to measure and are mostly inaccurate

representations, so the Spanish government may never truly understand the exact amount to tax on

e-liquid and nicotine products to correct the deadweight loss. Demerit goods and goods with high taxes

often create the issue of parallel markets, the illicit, illegal trade of products through imports from nations

where the products are cheaper, or have less regulation, and sold for a price much lower than the one set

in the market. For example, e-liquid and nicotine products are much cheaper in Dubai, UAE, compared to

the rest of the world. This would cause a total loss of tax revenue and consumption would not only remain

the same, it would be undocumented. Goods such as nicotine and e-liquid products are also addicting,

becoming price elastic to many consumers, a situation in which there is extremely low responsiveness in

the change of demand as a result of a change in price.

In the graph it is shown that since e-liquid and nicotine products have a price inelastic demand, the price

change from P1 to P2 would impact the quantity very slightly, if not at all, because of the extremely small

margin of change between Q1 to Q2. The government would still be collecting tax revenue, the sum of

the red and purple boxes, as the demand is inelastic and a higher price would not phase the consumers. In

the graph it can be seen that the consumer burden is higher than the producer burden, this is due to

inelasticity as consumers will pay higher prices, but producers will only have an increase in revenue.

Overall, the implementation of indirect taxes upon e-liquid and nicotine products may be profitable to the

government as it will increase tax revenue, and most importantly, can decrease the demand of the

products for low-income and daily wage workers. Parallel markets may arise, further hindering society

and enlarging the externality, but in the short term, indirect taxation is a form of intervention that is

beneficial to society and the government in numerous ways.