Law of Diminishing Returns

If you want to influence someone’s behavior, one of the most effective ways to do it is through incentives. Incentives are the proverbial carrot on the stick that keep people motivated and moving toward the goal.  Most people are raised with incentives, however large or small. A small bargain with a young child, such as giving them a piece of candy in exchange for cleaning their room teaches them an important lesson that will motivate them for the rest of their life. Generally, incentives will work for people who want the most of life, but what about the people who don’t care much about life?

In Pierre Lemieux’s article ‘The Diminishing Returns of Tobacco Legislation’ published to his website May 19^th 2001, he makes some interesting points about the subject of the attempts that have been made by the government to persuade people to stop smoking. He touches on some of the tactics, such as the pictures of diseased lungs put on the packages, and sin taxes. The fact that the price consumers paid for cigarettes rose by 48% between 1995 – 1999,  but the change in demand was only 11% shows just how inelastic the cross elasticity of demand for tobacco actually is (the coefficient of 11% / 48% = 0.23).The vast majority of the increased price are sin taxes, and when the demand for a product is inelastic, then the vast majority of these taxes are paid by the consumer. This will equate to straight up tax revenue to the government. How can smokers be so willing to continue in the face of such large disincentives?  An interesting point that Mr Lemieux has uncovered is that between 1985 – 1995 there was also a rise in the price of cigarettes to the tune of 52%, with an 18% drop in quantity demanded, which resulted in a cross elasticity demand coefficient of  0.35. Clearly, as time has gone on, the effectiveness of the price increases has become victim of the law of diminishing returns. The people have spoken, and have shown that they have accepted the high prices.

Mr Lemieux seems to support a move toward gentle prohibition. In a way, this has already happened, as most businesses now do not allow smoking within 10 feet of their building. The heated indoor smoking lounges at airports have become a thing of the past. However, this may be a bad idea, as it may lead people to hide and smoke in dangerous places, such as in alleyways, where their cigarettes could start a fire if improperly extinguished. The ashtrays that used to be available in public areas have mostly been removed.

The fact remains that cigarettes are addictive, so it’s likely that as people are desensitizing to the pictures on the packs, they are buying more packs. Some people are just going to smoke, even though you have to live under a rock to not know that they are deadly at this point. Some people just have less interest in self-preservation, so a picture of a diseased lung has no effect on them. Anyone who was offended by a picture of a diseased lung gave up smoking long ago. In Quebec, entrepreneurs have even come out with ironic warnings and pleasant pictures to satirize the government’s efforts at panic warnings, so these warnings are just a joke to some. The point of diminishing returns may have kicked in the moment that these serious warnings became satirical. Although the sin taxes don’t make a huge difference, and the evidence of the diminishing returns, they do make a solid dent in demand, and if smokers are willing to pay them, then it may just be a necessary evil that can have positive effects. Perhaps some sort of tax on cigarettes that goes directly into a fund to research cancer may actually have a positive outcome in the end. Maybe smokers should be forced to swipe a card when they purchase cigarettes to track their personal consumption, and tax them individually based on their personal consumption. More smokes = more taxes.

Citations:
Pierre Lemieux ‘The Diminishing Returns of Tobacco Legislation’ published to his website May 19^th 2001
http://www.pierrelemieux.org/artdiminish.html