Assignment
Tobacco smuggling, price elasticity of demand and tax revenue One of the impacts of the increased geographical mobility and more open borders which have accompanied globalisation has been a dramatic increase in smuggling activities. For example, tobacco smuggling features in many reports as Britain's fastest-growing category of crime. Customs and Excise estimate that around £3bn is lost in revenue each year from tobacco smuggling, including cross-Channel bootlegging, large-scale freight smuggling from outside the EU and the diversion to the home market of cigarettes officially designated for export. The VAT and excise duty lost has been estimated as equivalent to around 30% of the amount actually collected. In fact the UK Chancellor of the Exchequer, Gordon Brown, was advised when preparing his recent Budgets to rethink any additional tax rises planned for tobacco. This advice was in recognition of the huge differences already existing between UK tobacco prices and those in other EU countries, thereby providing a huge incentive for smuggling. For example, a 50-gram pinch of hand-rolled tobacco which costs around £8 in British shops can be bought in Belgium for less than £2. The result of these price differences is that bootlegged sales now account for 80% of the UK market in hand-rolling tobacco. Customs and Excise also estimates that in the north of England around half of all packets of cigarettes sold are contraband. In the past three years trade in smuggled cigarettes has nearly doubled. The government has found that its revenue from tobacco is one-third less in 2004 than it was in 1999, largely due to smuggling. Studies by the Treasury recommend the use of X-ray scanners at Channel ports, ‘duty-paid' marks on packs, and heavier penalties for those caught smuggling, but have also told Mr Brown that such counter-measures would not work unless the price gap between legitimate and smuggled goods was narrowed. These studies also point to the fact that Canada, Sweden, Denmark and Switzerland have all reduced tobacco smuggling by cutting duty rates.
Questions
1 What does the case study imply is happening, as a result of increased smuggling, to the effective price elasticity of demand for tobacco in the UK?
2 Consider the advantages and disadvantages of the Chancellor following the advice to avoid raising taxes on tobacco.
3 Suggest any implications this case study might have for the French policy towards tobacco users outlined in Case Study 2.2 (p. 58).
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.