10/28/2010

Japanese Cigarettes

Japan announced a national tax increase on cigarettes raising the price by a third. Cigarette sales shot through the roof and has given the economy a little boost. The demand for cigarettes is usually inelastic because smokers want or need their cigarettes and will pay most prices to get them.
Looking at the demand for cigarettes in this case we can see that the people realized there would be a price increase and therefor a reduction in the quantity that could be purchased. Also, considering the inelasticity for the demand of cigarettes these people would still purchase cigarettes even if the price were increased. So, to save money, these consumers started stock piling cigarettes to save some yen.
One consumer purchased 100 cartons and saved approximately $1,300 in potential taxes. Many others are buying what they can with 30 cartons being the norm. This hoarding effect will cause a future drop in sales but things should return to a normal level after the stock piles are smoked. Once this consumption does return to a normal level you should see the quantity demanded decrease from the consumption level that existed before the tax announcement but not by a third, it should be less due to the inelastic nature of cigarette consumption.

4 comments:

Rex said...

It will be interesting to see if the new tax is actually beneficial in any way. Obviously, first and foremost, the goal is to reduce smoking. The next goal is to raise tax revenue. I will be surprised if it substantially does either. If the tax is substantial enough to get people to purchase 30 cartons in advance, it is substantial enough to start a black market for them, or to encourage people to find alternative ways of obtaining cheap cigarettes. With a market as huge as Japan, it is also likely that cigarette companies will decrease prices to make sure the people can still afford them. Addicted people will explore all possibilities before they quit smoking. With the enormous demand for cigarettes, there will always be significant competition, legal or not

Kimball said...

This article is very interesting. I do not think that this price increase will start a black market however. It may among the youth of Japan and also among the less-than-moral Japanese Yakuza, but the majority of smokers are young to middle aged men who are honest workers with a high sense of loyalty to their country and the law. I think that the majority of people would quite before they get too deeply involved with illegal means of acquiring smokes. I think that this price increase is a good thing for Japan and will help push the awareness of the Japanese concerning the damaging nature of cigarettes. It would be great if cigarettes could be banned from public locations.

als22 said...

I look at this article in a different view. The idea of imposing the tax increase was to discourage smoking. 10% said they would quit if an increase was imposed of 50 yen. 50% said they would quit if the increase was 200 yen. Why did the government decide to only impose a tax of 110 yen? To what degree did they want the smoking to decrease?

It does not say, but I think some of the decision was made on behalf of Japan Tobacco, which the article says controls 60% of the tobacco market in the country. The largest stakeholder in Japan Tobacco is the Finance Ministry. Could the tobacco company and the government be making some decisions behind doors to make sure both interests get the biggest bang for the buck? I think so. Maybe that is where the tax increase was settled, behind closed doors, and maybe less in the interest of the people.

Dave said...

-1 on Denver and Kimball for spelling errors.

Rex: I think it is naive to think a government is increasing taxes primarily to discourage smoking - no matter what they say. ALS22 has a an interesting take on this possibility.