The aim of the price floor is to deter the use of tobacco consumers and society as a whole. Consequently, consumer demand for cigarettes will in the long term contract from Mq to Qd because they will not be willing to spend money for the given quantity whereas the supply will be extended from Mq to Qs. Because Qs exceeds Qd, there is an excess of supply, essentially over-providing the demerit good through its surplus of tobacco.
Suppliers of tobacco producers will have greater incentive to supply for the price above the equilibrium Pe, whereby supply is equal to demand, leading to an inefficient allocation of resources within the market. As consumer demand declines, allocative efficiency and deadweight loss will occur, resulting in the overall revenue of the producer of tobacco goods to fall. ABC represents the amount of money the society loses because of loss of producer and consumer surplus. The opportunity cost of proposing a tax, and suffering the losses, is funding government projects that positively impact society as a whole such as parks or education. Further marginal private benefits exceed marginal social benefits because when individuals smoke, they experience personal satisfaction, however, the negative externalities of consumption are second hands smoke, pollution, cigarette-butt littering and potentially influencing others to smoke cigarettes as well, which is an example of an external cost. Cigarettes are considered a demerit good because they are detrimental to the consumer’s health, can lead to third-party impacts such as second-hand smoke and also costs consumers a lot of money to maintain. The role of cigarettes in society is relative to the public good problem as when cigarettes are produced, they cannot be controlled or limited in terms of consumption. In the long term, the government will benefit from tax sales and as a result, have an increase in overall revenue, however, consumers who cannot afford cigarettes, more specifically low-income users, will alternatively purchase tobacco products on the black market or going out of state where prices are cheaper.
This mutes the positive impact of the law and leaves consumers and producers worse-off. The use of a tax and price floor alone to reduce cigarette consumption may lessen the market activity of cigarettes in New York, however it is not enough to induce a large scale reduction in actual consumption.
