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Old March 13th, 2009, 12:15 AM
Hajo Flettner
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Hookah Legend
Join Date: May 2007
Posts: 4,746
Default Re: new tobacco taxes?

Originally Posted by Scoop View Post
this goes against basic economic theory. the less demand, the lower the price. doesn't even make sense logically, if the demand is low, and you charge more, the demand will continue to drop.
Setting aside Brad's correct observation you are overlooking the distorting effect that taxation often has on pricing. You see the thing is that real life economics often don't work the way an American text book say they do and after studying excise taxes for more years then most of the posters here have breathing I've come to know a little about how these things work.

When a tax is placed on a manufacture what the manufacturer charges the wholesaler is correspondingly increased by that amount. The wholesaler then typically adds 30-50% on to his costs which is what the retailer pays who then charges the customer 30-50% more then what he paid. Bottom line is that the increased cost to you the consumer is compounded as shown above and from there it gets worse. It gets worse because the local and state taxes are affixed onto both the wholesaler and retailerís new, higher pricing resulting from the increased federal tax.

As the new, higher costs drive down demand and the retailer is faced with operating costs that are largely fixed he often increasing his prices hoping that the higher per unit price will compensate for any lost volume. Sometimes this accomplished by moving up market and some times it is accomplished a brief period of below market pricing being used to drive competitors out of business thus providing an opportunity to force the now smaller market to accept prices that are then the mere tax increase would indicate.

As Brad mentioned the question of the elasticity of demand comes into play and with luxury items like tobacco it is not reasonable to assume that a price increase results in a corresponding decrease in demand. In part that is because the market for moassel in the states is driven largely by demand from college students whose bills are typically paid by parents and student loans. Such people are obviously more capable of absorbing price increases then are working peoples although a downward change in consumption patterns is still likely. What happens in real life rather then a simple supply and demand curve is that consumption will decline but in manner not directly proportional to the tax increase.

Naturally, a decline in consumption will more closely correlate with the actual price increase for consumers of cigarettes although to some extent that will be offset by an increase in low cost tobacco supplied by organized crime which is a little to complicated to go into here. Since the market for cigarettes is far greater then the demand for moassel and most cigarette smokers have much lower disposable income the college students one can reasonably expect that the established pattern of tobacco tax increases driving down cigarette consumption at rates greater then the percentage of the tax increase will continue as has always been the case.
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