Law of Diminishing Returns – Tobacco Legislation

Few points in the debate have merit. First, obviously the fact that “the phenomenon of diminishing returns to government intervention” is in place. Secondly, the figures show that the highest output was between 1985 and 1995 and then it started to decline. One of the reasons of the decline is that the smokers “who were the most easily persuaded have already quit.”

I agree with the author statement that too much information may kill information. If the information is redundant it can be easily ignored. It can be demonstrated by the fact that the new legislation that forced manufactures to print pictures demonstrating effects of smoking didn’t get the expected output.

Some points lessen the debate. The author refers to studies of American economist Kip Viscusi. He states that smokers “overestimate the risks of smoking as evaluated by the public health literature.” I strongly disagree and I think that smoking risks cannot be overestimated as smoking is addictive as well. Most likely they are underestimated; otherwise a lot more people would quit smoking.

The point of diminishing returned for government was approximately in 1995. The number of people quit smoking was the highest by that moment. After this point the return began to decline regardless higher prices.

There should be new solutions or actions taken to lessen the diminishing effect. I think the government to target the younger people first. For those who smoked couple of years or may be few months would be much easier to quit. One of the ways – to raise the minimum age of those allowed smoking. In Canada the legal smoking age is 18-19 years old depending on the province.  If government makes it 21 years old there will be less youngsters starting to smoke.

The article confirms the fact that tobacco is a very inelastic product. Regardless the higher prices the demand remains stable. Moreover, the consumers try to circumvent taxes and regulation by turning to a smuggled consumption.

As higher taxation can be applied to tobacco as a sin product the article debates on feasibility of higher taxation for cigarettes to lessen the Diminishing effect. Higher taxes bring more criminal into play if it concerns addictive products.

Tourism Industry in Canada

http://en-corporate.canada.travel/research/statistics-figures/international-visitor-arrivals#international

The state of Tourism Industry in Canada is improving. As we see from the graph above the number of travellers into Canada significantly dropped in 2009. It was the year of recession and this drop is quite explainable. But in 2010-2011 we can see a steep rise in number of international trips. The degree of elasticity of demand is high. The demand is Price elastic and Income elastic.

Canada is relying on service businesses heavily and tourism is one of them. This area is not fully developed and has a lot of potential growth. One of the initiatives taken by Canadian government to increase growth of tourism was to attract tourists from China.

Harper launched the new tourism campaign — which highlights Canada's West, including the Calgary Stampede — at the official opening of the Canadian Tourism Commission's newly outfitted marketing centre in the heart of Beijing.¹

¹http://www.vancouversun.com/travel/Harper+urges+Chinese+tourists+come+Canada/6116976/story.html

Elasticity and Revenue

http://www.foodnavigator-usa.com/Business/Orange-supply-price-squeeze-set-for-relief

The first graph shows the Demand Curve. In the left section of the graph the curve is very steep and demand is inelastic. It is 0.08 at the price change range $1.3 - $1.5. The right part of the curve shows that demand is elastic. At the price range $1-$1.3 the demand elasticity is 1.8. This trend can be explained by the time factor: after price increase demand dropped and then went up again over the time. It can be explained by the fact that we are dealing with orange juice and it is a normal good which cannot be totally substituted.

The revenue curve: when demand is inelastic the revenue falls with price fall. It is represented by the left side of the curve. As the demand becomes elastic the revenue rises with the price fall.

Changes in Demand

In a mixed economy there are numerous forces which change demand. They can be grouped as follows:

·         A change in preferences towards the product

·         A change in income

·         A change in price for a substitute product

·         A change in price for a complementary product

·         The expectation that future prices or income will change

·         An increase/decrease in population or a change in its income or age distribution

Example: In a small town a new bigger project was launched. A lot of local skilled workers got new job offers. They expect their income to increase. So they are going to spend more money for groceries. In my example below they will buy more strawberries.

Change in Demand for Strawberries
Price	Demand D1	Demand D2
$       2.50	110	120
$       3.00	105	115
$       3.50	100	110
$       4.00	95	105
$       4.50	90	100
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Game on - managing a business in a dynamic market and mixed economy

In a mixed economy Price is a driving force for buying-selling decisions. We have historical data for price fluctuations. Whenever buyer feels that the price is low – it is time to consider buying. Same works for selling goods. If prices are up the seller has a very good chance to make some money.

The scarcity of resources makes both buying and selling decisions more complicated. The online game I am playing has the features of real life: a farmer cannot invest all money into cattle even though the prices are extremely low; some resources should be spent for other necessities like food for cattle, wheat etc.

One of the ways to increase demand and supply for products is to go bigger and get a bigger share of the market. We may call it monopolistic approach.

The other way is to concentrate on some products thus taking a niche market space.

Possibility Curve

The mentioned graphs represent production possibilities curve with different variations. Scarcity of resources is a driving force for every graph (and economics in real life) and it means that only so many units of two (in our example) types of products can be produced. Opportunity cost means sacrificing of production of so many units of one product by producing so many units of desired product. Choice means what opportunity cost you pay by making your production decision. Say you give up producing 2 tons of wheat by choosing to produce 8 more cars. 2 tons of wheat is the opportunity cost.

I also have to make some choices managing my personal time and resources. I would like to make some renovations in my house and I also need a new car. My income allows me to do only one project at a time. So my choice is to buy a new car. There is also a time consideration for this decision. Renovation requires more supervision and I am very busy now with my courses while research is required for both projects. So renovation of the house is my opportunity cost for a new car.

My opportunity cost for returning to school has two components: time and money. I cut off my entertaining time such as reading, watching TV, socializing. I also have to pay for three courses per semester which is equivalent vacation in Mexico. These two are my opportunity cost. Instead I will gain better professional standing and salary increases in future.