Cigarette Smoking Price Elasticity of Demand
Tobacco use is one of the chief preventable causes of death in the world. Since 1964, health warnings have been mandated in the US on tobacco advertising, including billboards and printed advertising. In 1971, television advertising was prohibited. Most states have banned smoking in state buildings, and the federal government has restricted smoking in federal offices and military facilities. In 1998, the Senate engaged in heated debate over proposed legislation to curb smoking by teenagers. This bill would have raised the price of cigarettes by $1.10 a pack over 5 years, and the tobacco industry would have paid $369 billion over the next 25 years. Opponents argued that this price increase would be a massive tax on low-income Americans that would generate huge revenues to finance additional government programs and spending. Proponents countered that the bill was no about taxes. Instead, the bill was an attack on the death march of Americans who die early from tobacco-related diseases. Ultimately, The Senate was so divided on the issue that it was impossible, at least for that year, to pass a tobacco bill.
Estimates of the price elasticity of demand for cigarettes in the United States and other high income countries fall in the inelastic range of 0.62. This means that if prices rise by 10 percent, cigarette consumption will fall by about 6 percent. Moreover, estimates of the price elasticity of demand range significantly across states from 2.00(Kentucky) to 0.09 (Mississippi). The price elasticity of demand for cigarettes also appears to vary by education. Less educated adults are more responsive to prices changes than better educated adults. This finding supports the theory that less educated people are more present oriented, or “myopic,” than people with more education. Thus, less educated individuals tend to be more influenced by current changes in the price of a pack of cigarettes. Another study in 2000 confirmed that education has strong negative effects on the quantity of cigarettes smoked, especially for high income individuals. The presence of young children reduces smoking, with the effect most pronounced for women.
A study publish in Health Economics estimated the relationship between cigarette smoking and price for 34, 145 respondents, age 15-29 years. The price elasticity of smoking was inelastic and varied inversely with age: 0.83 for ages 15-17, 0.52 for ages 18-20, 0.37 for ages 21-29. Thus younger people were more likely to reduce the number of cigarette smoked in response to increased prices.
Analyze the Issue
According to the above discussion, what factors influence the price elasticity of demand for cigarettes? What other factors not mentioned in the article might also influence the price elasticity of demand for cigarettes? Use graphs as well if possible.
Is GDP A False Beacon Steering Us Into The Rocks?
Suppose a factory in your community has been dumping hazardous waste into the local water supply and people develop cancer and other illnesses from drinking polluted water. Then Environment Protection Agency discovers this pollution and, under the federal “Superfund” law, orders a cleanup and imposes a fine for the damages. The company defends itself against the EPA by hiring lawyers and experts to take the case to court. After years of trial, the company loses the case and has to pay for the cleanup and damages.
In terms of GDP, an amazing “good” result occurs: the primary measure of national economic output, GDP, increases. GDP counts the millions of dollars spent to clean up the water supply. GDP even includes the health care expenses of anyone who develops cancer or other illnesses caused by drinking polluted water. GDP also includes the money spent by the company on lawyers and experts to defend itself against the EPA. And GDP includes the money spent by the EPA to regulate the polluting company.
Now consider what happens when trees are cut down and oil and minerals are used to produce houses, cars, and other goods. The value of the wood, oil, and minerals is an intermediate good implicitly computed in GDP because the value of the final goods is explicitly computed in GDP. Using scarce resources to produce goods and services therefore raises GDP and is considered a “good” result. On the other hand, don’t we lose the value of trees, oil, and mineral in the production process, so isn’t this a “bad” result?
The Bureau of Economic Analysis (BEA) is an agency of the US Department of Commerce. The BEA is the nation’s economic accountant, and it publishes the Survey of Current Business, which is the source of GDP data cited throughout this text. Critics have called for anew measure designed to estimate the kinds of damage described above. These new accounts would adjust for changes in the air and water quality and depletion of oil and minerals. These accounts would also adjust for changes in the stock of renewable resources, such as forest and fish stocks. In addition, accounts should be created to measure global warming and destruction of the ozone layer.
As explained in the chapter, a dollar estimate of capital depreciation is subtracted from GDP to compute national income. The argument here is that a dollar estimate of the damage to the environment should also be subtracted. To ignore measuring such environmental problems, critics argue, threatens future generations. In short, conventional GDP perpetuates a false dichotomy between economic growth and environmental protection.
Critics of the approach argue that assigning a dollar value to environment damage and resource depletion requires a methodology that is extremely subjective and complex. Nevertheless, national income accountants have not ignored these criticisms and the National Academy of Sciences has reviewed BEA proposals for ways to account for interactions between the environment and the economy.
Analyze the Issue
Suppose a nuclear power plant disaster occurs. How could GDP be a “false Beacon” in this case? Show graph as well if possible.
Is It a Robot’s World?
In the late 1980’s, an article described a recurring labor market situation:
People looking for job security have rarely chosen the music industry. But these days, musicians say, competition from machines has removed what little stability there was. Modern machines can effectively duplicate string sections, drummers and even horn sections, so with the exception of concerts, the jobs available to live musicians are growing fewer by the day…
It is not the first times that technology has thrown a wrench into musical careers. When talking pictures helped usher in the death of vaudeville, and again, when recorded music replaced live music in radio station studios, the market for musicians took a beating from which it never fully recovered…The musicians’ plight is not getting universal sympathy. Some industry insiders say that the current job problems are an inevitable price of progress, and that musicians should update their skills to deal with the new instruments…
But others insist that more than musicians’ livelihood is at stake. Mr. Glasel, Local 802’s president, warns that unbridled computerization of music could eventually threaten the quality of music. Jobs for trumpet players, for instance, have dropped precipitously since the synthesizer managed a fair approximation of the trumpet. And without trumpet players, he asked, “where is the next generation going to get its Dizzy Gillespie?”
The threat to musicians’ jobs continues: the Toyota Motor Corp. unveiled its instrument-playing humanoid robots at the 2005 World Exposition. The robots will play drums and horn instruments, such as trumpets and tubas.
And nurse’s jobs beware! A 2002 Washington Post article reports:
Whenever a new patient is admitted to the Veterans Affairs Medical Center, a four foot eight-inch talking robot rolls up to the nurses’ station nearest to the patient’s room, bringing doses of whatever drugs the doctor has ordered. TOBOR, the robot, is a delivery “droid” that glides along the corridors day and night, ferrying medicines from the hospitals central pharmacy to its wards. Bigger and boxier than R2D2, the rolling robot in the Star Wars movies, TOBOR shares the hospital’s elevators many times a day with patients and visitors. It announces its intentions in clear baritone voice. “I am about to move,” it tells fellow passengers. “Please stand clear.”
Robots that interact with human co-workers or the general public are still relatively uncommon. Yet “service robots” designed to perform mundane jobs such as delivering drugs, food trays and laboratory specimens, are increasingly being employed in hospitals which must operate 24 hours a day and face sever labor shortages and high costs for personnel…TOBOR’s human co-workers, for the most part, seem to ignore it. Children greet it with cries of delight. Some patients play chicken with it when they meet it in the hall, trying to fake out the robot’s sonar “vision.” Brian Babbitt, general manager of Helpmate Robotics, state, “When you look at nursing and pharmacy labor shortage, you want to keep skilled personnel with as high level tasks as possible. You don’t necessarily want people hauling things around and waiting for elevators.
Now there is a Robot hall of Fame established in 2003 at Carnegie Mellon University. The robots fall into two categories-robots from science and robots from science fiction. A panel of experts, each serving a two-year term, chooses robots in each category to be inducted into the Hall of Fame. Envelope please! The first winners were: The Unimate, the first industrial robot; the Sojourner robot from NASA’s Mars Pathfinder mission; R2D2, the “droid” from the Star Wars films; and Hal-9000, the rogue computer from the film 2001: A Space Odyssey.
Analyze the Issue
Use graphs as well when possible.
When the Inflation Rate is 116, 000 Percent, Prices Change by the Hour
The following are some outstanding historical examples of hyperinflation:
A 1985 Wall Street Journal article described hyperinflation in La Paz, Bolivia:
A courier stumbles into Banco Boliviano Americano, struggling under the weight of a huge bag of money he is carrying on his back. He announces that the sack contains 32 millions pesos, and a teller slaps on a notation to that effect. The courier pitches the bag into a corner. “We don’t bother counting the money anymore” explains Max Lowes Stah, a loan officer standing nearby. “We take the client’s word for what’s in the bag.” Pointing to the courier’s load, he says, “That’s a small deposit.” At that moment the 32 millions pesos-enough bills to stuff a mail sack-were worth only $500. Today, less than two weeks later, they are worth at least $180 less. Life’s like that with quadruple digits inflation… Prices go up by the day, the hour or the customer. If the pace continues all year it would mean an annual rate of 116,000 percent. The 1,000 peso bill, the most commonly used, costs more to print than it purchases. To purchase an average-size television set with 1,000 peso bills, customers have to haul money weighing more than 68 pounds into the showroom. Inflation makes use of credit cards impossible here, and merchants generally can’t take checks, either. Restaurant owners often covered their menus with cellophane and changed prices several times daily using dry-erase marker.
A 1993 Associated Press article reported a rate of inflation in the billions for Belgrade, Yugoslavia:
The number Wednesday was 286,125,293,792. It was not the day’s winning lottery figures or the number of miles to the Hubble space telescope. It was the latest calculation of Yugoslavia’s nearly incalculable inflation rate… To cover the cost of war and pay off the unemployed, the government has resorted to indiscriminately printing money. That has rendered the national currency, the dinar, practically worthless…” Look at the prices,” Spomenka Magas, 39, a homemaker said in disgust. “I cannot count all the zeroes anymore.”
A 2001 Newsweek article made the following observation:
Hyperinflation is the worst economic malady that can befall a nation, wiping out the value of money, savings, assets, and thus work. It is worse even than a deep recession. Hyperinflation robs you of what you have now whereas a recession robs you of what you might have had. That’s why it so often toppled governments and produced revolution. Recall that it was not the Great Depression that bought the Nazis to power in Germany but rather hyperinflation, which destroyed the middle class of that country by making its savings worthless.
A 2003 article in Finance & Development offered this analysis:
The milder problem of chronic high inflation ceased to be a problem in the advanced economies in the 1980s and in the developing countries in the 1990s. The benign inflation environment of recent years may lead some to believe that chronic high inflation and hyperinflation have been eradicated for good. History suggests that such a conclusion is not warranted.
Analyze the Issue
2. Explain why the workers in Bolivia were striking even though wages rose at an annual rate of 1500 percent. Do you see any connection between hyperinflation and the political system? Use graphs as well if possible.