Cigarettes on the Black Market

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). 

Fall in Consumer Confidence

Consumer confidence continued to fall last month amid increased uncertainty around the UK's economic outlook and is set to dip further in August, a survey said today. The recent riots earlier this month could trigger even more deterioration in confidence as the violence hit people's willingness to spend, Nationwide Building Society warned.

Nationwide said its Consumer Confidence Index was 49, well below its average reading of 79. In June, the reading was 51.

Economists are predicting that the rest of 2011 will see no considerable improvement in consumer confidence. This may lead to even greater falls in stock markets around the world and could lead the world back into recession. Falling consumer/business confidence is the last thing we need to achieve periods of economic growth in the coming years. The LRAS curve may shift leftward if AD and (SR)AS shift leftward too.

The Government’s plan to freeze public sector pay for now and other private sector firms simply not rising wages in line with inflation (known as fiscal drag) means that the cost of living is rising, severely affecting consumer confidence.

Major purchases of big-ticket items are the hardest hit, Nationwide said, and consumers also continue to expect a fall in house prices over the next six months. This means the value of people’s assets are falling, and consumers will feel ‘poorer’ furthering the fall in consumer confidence.