This post is an example of the Law of unintended consequences. One in three cigarettes sold in London in the beginning of this year is illegal, in contrast to the one in five that it was at the end of 2011. The black market for tobacco is responsible a loss of revenue to the Treasury accounting to more than £2billion, going to smugglers and criminal gangs instead.
Key points to remember from this case study:
1. Increasing taxes on demerit goods may not provide incentives for people to give up/consume less, instead giving incentives for people to sell illegitimate 'illicit whites'.
2. They are bought and shipped from China very cheaply and sold cheaply for people to consume (Black Market). Evidence against free trade and China?
3. Taxation is designed to raise money for government expenditure, however £25million is spent by the government to reduce black market activity.
4. Demand for tobacco (as with any demerit good) is inelastic, meaning that the proportionate rise in price will lead to a less proportionate fall in demand, because consumers are satisfied with illegitimate copies.
Smugglers can make approximately £1.65million from bringing in a container of 10million counterfeit cigarettes. Each packet is made for just 20p and they have been found to contain substances such as asbestos (a harmful substance known to cause lung cancer and other illnesses).