Price elasticity is not something usually talked about in the pub. Price elasticity is the concept used to set the optimum price for goods or services. To maximise revenue.
For example if you put up the price of drink, how many people will stop drinking? Very few, experience tells us. Therefore alcohol has a high price elasticity. You can keep increasing the price and people will keep drinking. An elastic property that publicans, brewers and government like to stretch all the time.
So too with cigarettes.
But cigarettes have an additional property. They are almost universally addictive. So the physical craving overcomes the additional 10c or 20c lashed on to the price at budget time.
This year might be different. This year the Government is severely strapped for cash. Stories have appeared in the media that the Minister for Finance Charlie McCreevey is considering adding €2 to the price of cigarettes.
Such a rise could bring in an additional €600m in taxes to offset the disastrous fall-off in income taxes.
There is, of course, a dovetailing between the wishes of the Department of Finance and the Department of Health. The health minister Miceal Martin declared that smoking was his biggest problem when he took over the job. He pushed through legislation banning advertising and controlling display of cigarettes. He wants to do more.
It has been proven (so it’s said) that the poor and the young are put off smoking by the price of cigarettes. Personally, I can’t find any reports to this effect (I’m sure someone will provide me with one) and I don’t see much evidence of this in recent history.
Two budgets ago Charlie McCreevey put 50p on to a pack of cigarettes and the drop in smoking was barely discernable. An opinion poll showed a general drop of about one percent in the numbers that smoke. That’s well within the margin of error of general opinion polls so there could have been a rise in smoking for all we know.
As well as that, the increasing intolerance of smoking, particularly in the workplace, must have had some effect.
The lesson for the lads in the Finance Ministry is that the 50p rise had practically no impact on the level of demand. So the way is clear for any price rise short of causing a revolution.
But hang on a minute. Tobacco is a drug and it has the economic characteristics of many other drugs. If you ban it people will find their own supply. The worst elements in society will make a killing (and provide a few killings too).
The price rise is not a ban. It is, however, a constructive ban. Poor people will have to find their supply elsewhere. And there are plenty of suppliers.
In the year 2000 the customs seized €24m worth of contraband cigarettes. You can bet your life that is just a fraction of the real trade. Imagine the profits to be made if the price of contraband tobacco rises by about 100%.
The cynical thing is that the price rise is all about raising cash. Never mind who’s doing the paying, never mind the health strategy (smoking kills 7,000 people a year in Ireland) and never mind the effect on the criminal underworld of Dublin.
They are going to make the same mistake they make with every other drug.
They just can’t kick the habit.
As well as that…
Letting the poor solve the crisis
The big problem with raising the price of cigarettes by €2 a packet would be a whopping increase in inflation. Economists reckon that such a rise could increase inflation by two points.
This would be very bad news for the Government because it would be happening just when employers and unions are sitting down to negotiate a new national wage agreement.
The Government would like the price of cigarettes taken out of the Consumer Price Index (CPI) but the unions won’t accept that.
I think they are right.
The additional €600m brought in from the hike on fags will just about cover the €500m being used to pay the special savings scheme. People who smoke fags are generally poor and people who save in the SSIA are mainly middle-class.
Talk about a regressive tax! Why don’t we charge for visits to the social welfare office while we’re at it?