UAE economic improvement
The UAE has made tremendous economic improvement since imposing the 100% excise tax on tobacco and tobacco products in 2017. These, coupled with the 2018 increase in value-added tax of 5% and a further levy of 100% excise tax on all electronic smoking devices in 2019, have led to decreased instances of market failures due to negative externalities had initially led to a welfare loss.
Market failure. The inefficient supply of products and services in the market is caused by adverse effects of smoking to the third party creating a weak production network.
Negative externalities. Additional medical costs derail third parties in the economy due to the effects of nicotine through passive smoking.
Negative Consumption Externalities
X- Welfare loss before tax and Negative Consumption Externalities
The marginal social cost (MSC) intersects the marginal social benefits (MSB), and output occurs in the form of welfare losses and negative consumption externalities. These show the adverse effects to the third party that is associated with the smoking habit in the UAE. Where Q2 meets P2 should be the optimal level for the society. Government has introduced taxation and additional levies on tobacco in its quest to attain a socially optimal level. With the introduction of taxes in October 2017, a reduction in consumption has been witnessed. Affordability has pushed most middle and almost all low earners out of the use of tobacco. However, the few who can afford are not deterred by the price, a worrying trend that will affect the market further though in small volumes. One individual consumption of tobacco reduces the wellbeing of other non-users in the market, thereby causing losses in terms of productivity.
Further increase in taxes by the government in January 2018 and December 2019 (Abbas, 2020) ensures that tobacco consumption reduces, impacting the consumers and third parties positively. Third-party effects from passive smoking has forced the government to instill more measures, with an additional 5% value-added tax imposed on tobacco in 2018 in the push to attain a more socially optimal level. Therefore, the new prices left only those with deep pockets and financially stable in a position to afford the tobacco hence a nation moving towards the realization of a massive reduction in smoking habits and limited health issues.
Externality theory elaborates on negative externalities. It insists that overconsumption (Q1-Q2) arises when there is a further increase in cigarette consumption. These causes marginal social benefit (MSB) to be below the marginal private benefit (MPB) and a new social optimum level(Q2) that will be lower than the equilibrium level (Q1) in the competitive market factoring the deadweight loss marked x. The government is pushing for further measures to ensure the younger generation don’t develop smoking habits. Tax increases will help the youth attain adulthood without easily getting attracted to their smoking habits, hence a positive outcome in the economy.
Solution
Globally the levy on tobacco has been instituted in 185 countries with Finland leading at 87.41%. Currently, UAE accounts for 73.54% combined tax rate, quite a significant percentage considering the short period it has taken to cover the margin. But in as much as the government has imposed more taxes to curb the spread of smoking habits, more economically-friendly approaches are embraced. Trying to extinct tobacco from the market with high taxations will only mean an increase in job losses and a further increase in poverty levels due to overdependence. The following measures can be implemented;
Actions such as the creation of smoking zones can be applied to help curb the spread to third parties who are relatively relevant to the production market. It might be a tall order to get the addicts who are well off to stop smoking. However, we can ensure their smoking patterns don’t affect the productive part of the country by creating secluded areas in both urban and rural areas.
The creation of advertising platforms on digital media will enhance and promote knowledge of lousy smoking habits. These will enable the public to make more insightful decisions.
Promotion of cancer education in schools and ensuring relevant authorities educate school-going children on the harm of smoking. These leaves and individual with a decision to make on whether to indulge or stay safe. Working on abstaining is more practical than trying to stop an addict.
Community programs can be developed to sensitize and offer counseling services to the addicts. This way, they are integrated back to the society slowly while quitting smoking. The programs should be tailored differently to enable every community to have its specifications and identity with the vice.
References
Abbas Waheed (2020). Taxes Hurt: No, Choice! But to Kick the Smoking Habit in UAE;
Khaleej Times