In the article, The Diminishing Returns to Tobacco (Lemieux 2001), the argument is made that there is a diminishing return to the efforts of government regulation and taxation to the decrease in tobacco usage. Governments around the world have implemented extreme taxation and advertising campaigns that include so called panic pictures on cigarette packages, in an effort to persuade smokers to quit the potentially lethal habit.
When a product like cigarettes has a very inelastic demand, even a large increase in cost will not significantly alter the demand. This is demonstrated by the fact that an increase in price of cigarettes of 52% only resulted in a decrease in demand of 18%, from 1985 to 1995 (Lemieux 2001). This small decrease in demand, relative to the increase in price, is indicative of the portion of the population of smokers, that are relatively easy to convince to stop (casual smokers or smokers wanting to quit already). This is essentially the point of diminishing returns for the government. The portion of the population of smokers that continue to smoke are those that smoke more heavily and are unable to break the nicotine addiction. These people are much more likely to engage in smuggling of cigarettes, due to the quantity required and the cost, they are willing to accept the risk of being caught and fined. In other situations, smokers are well aware of the health hazards and have either disregarded or minimized the risk posed to themselves. The appearance of cigarette package covers to cover the panic images intended to convince smokers to quit begs the question as to how effective these images are. Consumers have become over saturated with information regarding the negative health effects of smoking, which has lead to this type of scare tactic becoming mostly ineffective.
Compared to forcing panic pictures to be printed on cigarette packages, a more effective solution that may increase the government's success compared to their costs could be providing subsidized treatment programs or tax incentives for the cost of treatment. The cost of cigarettes is a know to consumers, whereas the cost of treatment can vary and could end up costing more than the cigarettes themselves. These programs could be funded by the government and offered through employee assistance programs or through health insurers.
I think that the statement "...health bureaucrats have become addicted to power." doesn't lend any credence to this argument. I don't think the health bureaucrats have any desire to have power over smokers, but they are experiencing the law of diminishing returns, which makes their mandate to reduce the consumption of cigarettes much more difficult to achieve and are now resorting to seemingly extreme efforts.
With regards to supply and demand for tobacco, the decrease in demand already achieved by government taxation and advertising campaigns would result in a surplus of tobacco which would lead to a decrease in the price obtainable by producers. This could result in a reduction of the number of producers willing to grow tobacco as a cash crop or a consolidation of tobacco producing land under a smaller number of producers. This could actually result in cigarette manufacturer's realizing an increase in their profit margin. The cost to consumers would remain relatively unchanged since most of the cost of a package of cigarettes is tax which must be paid and in this case, it is paid by the consumer.
I don't think that prohibiting cigarettes would be an effective method of eliminating smoking. This would only lead to increased smuggling and create another illegal trade opportunity, similar to the prohibition of alcohol in the US during the 1920's and 30's. This could lead to prices for cigarettes that are even higher than with the high government taxation levels due to the increased cost of covert transportation and interception by law enforcement. This could also increase crime rates, for those that still require cigarettes but are no longer able to afford them without engaging in criminal activities.
Due to the inelastic demand of cigarettes, the government taxation on cigarettes is in effect a sin tax. The increase in revenue for the government is easily calculated since an increase in price of a product with inelastic demand results in a very small decrease in demand and therefore the revenue increases proportionately to the increase in tax rate.
In conclusion, governments have reached the point of diminishing returns with regard to cost effectively reducing the consumption of cigarettes. Any further increase of taxation will produce a relatively small decrease in demand. The effectiveness of panic pictures on cigarette packages appears to be minimal due to avoidance and dismissal by consumers. A possible solution for governments to shift the point of diminishing returns is providing a monetary incentive to smokers to quit, through subsidized treatment programs or tax deductions for treatment.
Citations
Pierre Lemieux (2001) The Diminishing Returns to Tobacco Legislation Retrieved December 27, 2011 from http://www.pierrelemieux.org/artdiminish.html
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