Cigarette Market Around the World

In a recent article from Romania-insider.com, I read that Romanians have cut down on cigarette consumption and spend 10 times less than Slovenians. It was expected that tobacco market in Romania could grow to EUR 4.2 billion in 2012. However the retail value of Romanian market would cover less than 10 percent of the total Eastern Europe tobacco market in 2012.

One possible reason for this could be that Romanian government may have set campaigns to build awareness of the harmful impacts of smoking. The effects of this are shown in Fig.1.

As you can see from Fig.1, increasing awareness of health issue regarding smoking would shift the demand curve from D₁ to D₂. Since less quantity will be demanded, supplier’s cost of production is likely to increase. As you can see, due to fall in demand, an excess supply has resulted between Q1 and Q3. In the short run producers may not be able to sell large quantities of packs due to increase in health awareness. This could eventually push the price of cigarettes higher, maybe resulting a further fall in consumption of cigarettes.

In another news article called thestaronline.com, I read that Malaysia will be banning discounts on all cigarettes and only 20- stick cigarette packs will be allowed for sale in Malaysia. Furthermore a price floor of RM7 had been introduced by the Health Ministry. The standardized price was introduced in 2011 but this year the number of sticks per pack has also been standardized to 20 sticks per pack. This had been done to further strengthen the enforcement of the Control of Tobacco Product Regulations 2004.

So basically what the government has done this year is with the imposition of a minimum price it has also limited the quota per pack.

This how the graph for looks for minimum price in Fig.2.

As you can see in Fig.2, introducing a floor price of RM7 results to excess supply between Qd and Qs. This excess supply could be purchased by the government for later purposes. Perhaps if demand for cigarettes increase later, government could sell the cigarette back into the market to ensure that price stays at floor price. Furthermore Malaysian government has also limited the number of sticks allowed in a pack i.e. 20 sticks and the number of packs allowed in one box (10 packs per box).

All this is well good, but the problem with limiting the amount of cigarettes is that it could potentially create a black market for cigarettes selling more number of sticks per pack. If this happens Malaysia will be losing out on a lot of tax revenue.  The article suggests that government plans on reducing the excess demand by promoting campaign awareness through various mediums like Facebook, Twitter, and press conferences. This could help reduce the excess demand, but I think that increasing awareness will only reduce only a small proportion of the population. So maybe all this investment in campaign and regulations may not have that big of an impact on consumption in the long run.