The Impacts of Tobacco in Local Industry

(http://www.euromonitor.com/tobacco-in-malaysia/report, Aug 2011)

In this particular report, industry of tobacco in Malaysia was facing many challenges last year in 2011 and it decreases the performance of the tobacco industry because of the illicit trade, high taxes and minimum price ruling happening in Malaysia. The three big manufacturers, British American Tobacco, JT International and Philip Morris companies are controlling and further dampened the sales of local market. What cause this from happening? Based on the situation that was happening in Malaysia, the government imposed higher taxes and minimum price ruling in order to reduce the number of smokers in the country. Furthermore, with all these policies, it further descends the tobacco of local market. Therefore, consumers are opted for other alternatives which are cheaper such as tobacco and cigarillos. 

As shown in the figure 2.0 above, when the government imposed tax on sellers, an increasing in cost will occur so it will decrease the supply and it also will automatically reduce the amount of quantity demanded .In the graph above, the supply curve shifts to the left because of reducing in quantity supplied and form a new price at the new dotted point (orange dot). The quantity decreases form Q to Q1 therefore, there is an inefficiency of production where it leads to a loss and it is called social loss (purple triangle). It is a loss to the society but it is tax revenue (blue rectangular) to the government. The government is not also trying to reduce the problems of smokers but it finds that they could gain much revenue by doubling the taxes.

Why is this happening to the local tobacco industry? This is caused by the interference of government into the market. When government enters, it happened to be a market failure. Why is this happening? As happened in this report, the government increases the taxes and even doubled it and also they doubled the minimum price ruling. This may cause a lot of problems to the society. Firstly, sellers will be incurring loss because of the imposing of tax to them. So, by hook or by crook, the maximum price that can be set is as much as the amount of tax given. So by that point they cannot make profits because if they increase the price, no one will buy them. The price rises from RM0.70 per pack of 20 sticks to RM0.80 per pack of 25 sticks. Secondly, it will give a big impact to the buyers that have lower income. This is because, Malaysia is majority middle incomers compared to high incomers. Thus, they find other alternatives by choosing other substitute of cigarettes such as tobacco and cigarillos. 

When the government doubled the minimum price ruling, what will happen to the sellers and buyers? In the figure 3.0 above it shows that the minimum price ruling or it is called also price floor where it is set temporarily by the government when something is happening to the economy. Government sets the minimum price ruling is to reduce the amount of anti-smokers but sometimes it doesn’t work because of the appearance of illegal market. Firstly, minimum price ruling affects the producers company. Why? Because minimum price ruling is set above the equilibrium point as shown in the figure above. When this happens, the producers have a deadweight loss (purple triangle). This is because they produce more than the consumers are actually buying it so it leads to an inefficiency of production. Therefore, it causes loss to the sellers. How can this give an impact to the buyers? Is the same as before, it affects the lower incomers because government doesn’t let the producers to lower down the price or else they will be issued. There is a complication that government has to face which is black market or illegal trading. The effect from this, sellers won’t be satisfied by the decision made by the government therefore, they try to smuggle the cigarettes and sell to the buyers who really want them. They sell them especially to the small retail shops in the remote area and sell them at the lowest price to cover their losses. This will lead to a price gap between the legal and illegal cigarettes. For example, legal cigarettes are selling off at RM7.00 per pack but some of the sellers that make an illegal trading they sell off the cigarettes at a price of RM4.00 per pack. Therefore, RM3.00 difference is the price gap.

So far, these problems will not have the ending story as it will continuously happen in the economy if the sellers don’t take any actions. Therefore, sellers need to find solutions to overcome these problems. Based on my opinion, firstly, by selling electronic cigarettes they also can make profits and at the same time can help the government to reduce the number of smokers in the country. How can this help the government to reduce the number of smokers? Electronic cigarettes are less harmful compared to normal cigarettes because it does not contain any harmful substances such as nicotine. So at the end of the day, number of smokers is getting lesser and also the average percentage of death that caused lung cancer can be reduced. Secondly, sellers also can sell cigarettes that contain less percentage of nicotine like 0.01%. People will still buy them but the risk is lesser compared to before because the more nicotine, the more number of people will die. Indirectly, it helps the government to control the number of smokers in the country. What can be concluded here is sellers are still making their profits and buyers are still buying the cigarettes. Thus, both parties can meet their satisfaction.