Analysis
The Hong Kong government is concerned with the negative social impact of cigarette consumption, which includes healthcare and second-hand smoking costs. The policy is to impose indirect tax on cigarettes, which was increased by 80 HK cents in 2024.
Evaluation
Short-run
- Inelastic demand due to addictive properties of cigarettes makes it difficult to decrease consumption in the short run.
- Tax revenue can be generated, which can be used to fund resources to help smokers quit or produce other beneficial goods.
- However, high prices may incentivize people to buy illicit cigarettes from parallel markets, resulting in lost government revenue.
Long-run
- As consumers have more time to reconsider their purchasing choices, demand for cigarettes may become more elastic, leading to a reduction in consumption.
- The long-term benefits include improved public health, lower healthcare costs, and government revenue that can be allocated to essential public services and healthcare initiatives.
Assumption:
- The externality of healthcare and second-hand smoking costs is difficult to quantify.