Paragraph 1: An excise tax are usually paid on goods made such as fuel. On the other hand a Sin Tax is a state tax aimed at goods that are harmful such as tobacco, alcohol and gambling. This tax is raised by governments to discourage people from taking part in such activities without banning the producers and services totally. Cigarette smoking and alcohol binging is a negative externality of consumption; an economic activity which imposes costs on third parties for which the consumer doesn’t pay. In this case, those are passive smoking, diseases from smoking and alcohol abuse and healthcare costs on the community. Negative externalities are one of the sources of market failure because they are caused due to overprovision of demerit goods, i.e. goods that are bad for not only the consumer but for the society as a whole. Leading to the article when it states that Finance Minister of South Africa has announced an increase in sin taxes for consumers of alcohol and tobacco. Paragraph 2: Here the graph is resemblance for negative externalities. The external costs of smoking and drinking are ignored by the smokers and drinkers alike , therefore social benefits are less than private benefits and the MSB curve lies below the MPB curve. The socially optimal amount of cigarette and alcohol Consumption is at intersection A, where MSC equals MSB and the market is in equilibrium. However, a larger quantity Q1 is consumed, which leading to a welfare loss represented by the grey triangle.Paragraph 3: When looking at such government intervention (tax on cigarettes and alcohol) there are both advantages and disadvantages. First the advantages of such intervention is raising cigarette and alcohol tax may decrease adult smoking and drinking by encouraging current smokers and drinkers to quit or at least reduce consumption. Secondly in past decades nearly every country has introduced a cigarette an alcohol tax increase to help fund healthcare sector, discourage smoking or help balance the country’s budget. Lastly, after consumers losing so much money. The second short term effect is that producers will have a rapid tax revenue flow in the beginning of the tax set by the government, the reason for this is that people in the beginning of this taxation will not realize the large effect and will still be buying these goods. Lastly while there are rapid transactions of money loss from the consumers pocket in the short run, this will result to a greater reduction in smoking in the long term.Paragraph 4: On the other hand the disadvantage of such intervention is that it reduces the disposable income on consumers which decrease their living standard and can lead to major problems in the long run. Secondly this sin tax is a regressive tax which means rich people pay exactly the same increases as the poor people which in a nutshell will increase the income inequality. Lastly Opposition from producers due to low revenue could lead to a higher unemployment. Workers at manufacturing company tend to be low skilled workers and may not fund other jobs,Paragraph 5: The to cut down negative externalities consumption is by imposing indirect taxes. Demand for cigarettes and alcohol is very inelastic, that means the demand is unresponsive to change of price, the reason is cigarettes and alcohol are addictive in the short run at least this has implication on the tax incidences. PED is relatively low, PE in this case should be relatively lower than the PES. PED is less than PES the tax incidence on consumers is greater than the tax incidence on producers, the reason being is because since consumers are unresponsive to changes in price, producers can pass a relatively large burden of tax onto consumers.Paragraph 6:To a certain extend using indirect tax on cigarettes and alcohol is effective in reducing smoking and drinking because it is going to be more effective for young people because they have a higher PED, because they are not addicted. In the short run indirect tax is less effective because the PED is lower in short run. In the long run consumers can find substitutes,the PED will rise. The benefits outweigh the costs of using indirect tax on cigarettes and alcohol because they are being over consumed, hence it will lead to welfare loss and will therefore benefit the society overall.
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