According demanded an increase in the excise

According to the article, University of
Indonesia demanded an increase in the excise tax of tobacco in order to reduce
smoking in the country and to increase the government revenue. The reason they
are dissuading people from smoking tobacco is due to the effect of negative
externalities of consumption as tobacco. Cigarettes is example of demerit
goods. A demerit
good is a good that is regarded as unhealthy or that can negatively affect the
consumer. These goods can also cause damage to consumers in ways they may or
may not be aware of. Demerit goods are also said to sometimes cause harmful
effects to those other than the consumer — think of secondhand cigarette
smoke, which affects not just smokers, but those around them as well. 1
The production of demerit goods usually lead to market failure. Market
failure describes any situation where the individual incentives for rational
behavior do not lead to rational outcomes for the group. 2According
to The World Health Organization, the minimum amount of excise on tobacco is
supposed to be 70 percent on retail price but in Indonesia it is 57 percent of
the retail price .


In a free market consumers will maximize
their private benefit and consume where MSC=MPB . Overconsumption of cigarettes
happens as people are smoking at Q1 cigarettes at a price of  p1 although the efficient output is at Q0
results in overconsumption of Q1 to Q0 as MSC is greater than MSB, there is a
welfare loss to society and market failure is created. Market failure occurs
when community surplus is not maximized and the socially desirable level of
output is not achieved. People who smokes gets private benefits of smoking but
it will create external cost for other people. An external cost or negative externality is a cost that a transaction or activity imposes on a
party that is not part of the transaction or activity. In other words, it is a
cost imposed on a party that cannot control whether or not the transaction or
activity occurs. This will also create discomfort and the cost to other
in the form of lung cancer, bronchial illness and asthma.

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!

order now


The Indonesian government is trying to reduce
this negative externality buy imposing excised tax on tobacco in order to
reduce consumption. Excise tax refers
to an indirect type of taxation imposed on the manufacture, sale or use
of certain types of goods and products.3 It
can be illustrated with the help of diagram below


If the government impose excise tax it will
shift the MSC curve to MSC +tax . This will help in decreasing the consumption
to output Q0 but the consumers have to pay price equal to p2. This will not
only increase the government revenue but also help in reduction of negative
externalities of consumption caused by smoking .


Raising the price of cigarette raise the
government revenue which can be use on other merit goods in the economy such as
building more public transport or health care facility. However there is still
one problem associated with this, although government revenue increases but
there wont be much significant decrease in the demand of cigarettes as demand
of cigarettes is inelastic by nature. Inelastic demand is a situation in
which the demand for a product does not increase or decrease correspondingly with
a fall or rise in its price.4 And also
taxes will make cigarette expensive so people might look for other sources for
supply either through smuggling or create another problem like black marketing.


Imposing excise duty may not be considered as
one of the effective measure as it will create more pressure on purchasing
power of the poor people as articles states that cigarettes is one of the most
consumed product in Indonesia after rice. In other opinions Indonesian
government could use other effective measures like by banning the cigarette
smoking totally or by providing education and awareness among the people
regarding the dangers of smoking. Government can also restrict smoking in
public places and workplace to reduce existences of smoking.