Cigarette Stocks Gone in Puff of Smoke Feb 26th, 2009 Timothy Chui and Grace Tsoi - Hong Kong Standard - Thursday, February 26, 2009 Smokers eager for a pre-budget- priced nicotine hit cleared convenience stores across the territory of cigarettes yesterday. News that the city’s tobacco tax was being increased by 50 percent - effective immediately - just before noon left stores short or sold out of cigarettes by early evening. One store clerk said his shop was cleaned out of 2,700 packs, with buyers breaking brand loyalty to snap up all 40 or so brands on offer. Street vendors also tried to make a killing by upping the price of pre- budget cigarettes before the 50 percent hike in tobacco duties announced by John Tsang took effect. Tsang said tobacco duties would rise by HK$8 per pack, taking the total duty per pack to HK$24 from HK$16. Last night Shau Kei Wan street hawkers were charging HK$37 a pack. The duty hike will boost the goverment’s take from HK$3 billion to HK$3.8 billion a year, said a government source who put the number of smokers in the SAR at about 600,000. He added that while progress had been made in making male smokers quit, younger female smokers were taking their place. Professor Judith Mackay, director of the Asian Consultancy on Tobacco Control and senior policy adviser to the World Health Organization, called the budget’s only tax hike a “much- needed, overdue and timely increase.” She said cigarettes were getting cheaper in real terms because tobacco duties had remained the same over the past eight years. She added that every jurisdiction that increased tobacco duties saw declines in smoking rates, especially among the young. Mackay said there was a 4 percent decrease in smoking rates for every 10 percent increase in tax, while a government source pegged the figure at 6.3 percent per 10 percent. Anti-smoking group Clear The Air called for a doubling in manpower for the Tobacco Control Office, and said legislation should be passed to bind tobacco duties at no less than 80 percent of final retail costs to prevent tobacco companies from absorbing the hike. A Japan Tobacco International spokeswoman does not see the number of smokers dropping after the tax hike. She pointed out that the average daily consumption during the early 1990s was steady despite a 200 percent tax hike in March 1991. She warned higher taxes will lead to more cheap illegal cigarettes. A Philip Morris Asia spokeswoman echoed the smuggling concerns. Economic Assignment 2 Cigarettes are a necessity for the smokers. No matter how the cigarette seller increases its price, the smokers still continue to buy similar quantity. Therefore the demand of cigarette is inelastic. When the demand is inelastic, percentage fall in quantity demanded is less than the percentage rise in price. Loss in total revenue is less than gain in total revenue. Quantity Total revenue rises. We can conclude that when there’s tax or other factors that led to the increase in price of cigarette, the smokers will still buy. And the seller will increase the price in order to increase its total revenue. The Financial Secretary Tsang imposed the tobacco tax ($8). He emphasized that, the tobacco tax can help raise government revenue and discouraging people to smoke simultaneously. The cigarette sellers immediately increase the price of cigarette per pack by $8. Which is increasing from $16 to $24, some of them even charge a higher price up to $37. A per-unit sales tax($8) will cause decrease in supply (S1>S2). The equilibrium price rises from $16 to $24 while the equilibrium quantity remains unchanged, as it is a habit for smokers. Which means the demand for cigarette is perfectly inelastic. The tax burden is borne entirely by consumers. In a newspaper article on 24/4/09 (私 煙 販 :多 謝 財 爺 加 稅 加 價 生 意 仍 大 增 ) told us that the increase in tobacco tax led to the presence of black market, which sold a even higher price of cigarette than usual ($39 per pack). As the price of cigarette is expected to rise in the future, the present demand for cigarette will increase, vice versa. (Evidence: Cigarette stock gone) Mary Law 4A (19)