Law of Diminishing Returns

Pierre Lemieux’s 2001 article “The Diminishing Returns to Tobacco Legislation” has some interesting points about government intervention in the tobacco industry.

The article mainly points out taxes the government and imposed regulations on packaging over the years. The most notable being that between 1985 and 1995 taxes were increased significantly enough to raise the price of cigarette packs by 52%. There was a drop in consumption by 48% during this time.  There was a further increase in price by 48% between 1995 and 1999 but only a drop in consumption of 11%.

Another considerable change that the government made in the tobacco industry was the inclusion of health warnings on cigarette packets but this action doesn’t seem like it was enough to encourage smokers to quit. Lemieux believes that government involvement in this was “less effective… smokers who were the most easily persuaded have already quit.” I agree with Lemieux because health warnings alone are not enough to stop people that are heavily addicted to tobacco. “As advice, warnings, and threats from authority become more numerous and visible, they tend to be discounted or ignored.”

It seems that looking at the two periods in reduced consumption, the point of diminishing returns is no longer moving. The peak reduction rate was between 1985 and 1995 and it seems, again, like Lemieux points out that most people who were willing to quit already have.

A solution that can help the government’s production would be free assistance to smokers who are willing to try to quit. They can offer free nicotine patches, gum and other products, include coupons in cigarette packets; also free sessions for professional assistance in quitting. The government could also get more involved in production of these products in order to increase revenue.

With tobacco being demanded by addicts, demand in this case would be inelastic. If the price were to increase, then demand would stay the same. Governments take advantage of this by increasing revenue with taxes known as sin taxes. These taxes apply to tobacco products and most alcohol products


Lemieux, Pierre, http://www.pierrelemieux.org/artdiminish.html