Question

Public policymakers often want to reduce the amount that people smoke. There are two ways that policy can attempt to achieve this goal. One way to reduce smoking is to shift the demand curve for cigarettes and other tobacco products. Public service announcements, mandatory health warnings on cigarette packages, and the prohibition of cigarette advertising on television are all policies aimed at reducing the quantity of cigarettes demanded at any given price. If successful, these policies shift the demand curve for cigarettes to the left. Alternatively, policymakers can try to raise the price of cigarettes. If the government taxes the manufacture of cigarettes, for example, cigarette companies pass much of this tax on to consumers in the form of higher prices. A higher price encourages smokers to reduce the numbers of cigarettes they smoke. In this case, the reduced amount of smoking does not represent a shift in the demand curve. Instead, it represents a movement along the same demand curve to a point with a higher price and lower quantity. How much does the amount of smoking respond to changes in the price of cigarettes? Economists have attempted to answer this question by studying what happens when the tax on cigarettes changes. They have found that a 10 percent increase in the price causes a 4 percent reduction in the quantity demanded. Teenagers are found to be especially sensitive to the price of cigarettes: A 10 percent increase in the price causes a 12 percent drop in teenage smoking. A related question is how the price of cigarettes affects the demand for illicit drugs, such as marijuana. Opponents of cigarette taxes often argue that tobacco and marijuana are substitutes, so that high cigarette prices encourage marijuana use. By contrast, many experts on substance abuse view tobacco as a “gateway drug” leading the young to experiment with other harmful substances. Most studies of the data are consistent with this view: They find that lower cigarette prices are associated with greater use of marijuana. In other words, tobacco and marijuana appear to be complements rather than substitutes. The case study is about imposing cigarette taxes as a way to reduce smoking. Now think about the markets for other tobacco products such as cigars and chewing tobacco and answer following questions. a. Are these goods substitutes or complements for cigarettes? b. Recalling a supply-and-demand diagram, explain what happens in the markets for cigars and chewing tobacco if the tax on cigarettes is increased.

Answer 1

a. It appears that cigars and chewing tobacco are substitutes of cigarettes rather than complements. Another view could be that they are unrelated (though it is difficult to believe at a first glance), because those who smoke cigarettes, don't start chewing tobacco if they cannot afford cigarettes, or 'graduate' to cigars if they get more money

b. If cigars and chewing tobacco are substitutes of cigarettes then we would expect the demand for them to increase with an increase in tax on cigarettes. This increase in demand would be shown as a rightward shift of their demand curve rather than as a movement along their demand curves.