Exercies 5-3) Law of Diminishing Returns

Law of Diminishing Returns

Read the debate “The Diminishing Returns to Tobacco Legislation” on the PierreLemieux.org  website. (http://www.pierrelemieux.org/artdiminish.html)

Consider the following:

    ·  Decide which points in the debate have merit.

According to the policy for reducing the rate of smokers, the rate of increase smokers decreased. However, decreasing rate is not more and more but even less and less thought the strength of reducing policies got bigger such “The Diminishing Returns” in economics.

     ·  Decide which points lessen the debate.

Studies by American economist Kip Viscusi lessen the debate. He commented that smokers overestimated the risks of smoking. However, smokers might not consider its risks too much because even thought the bigger risks referred on the cigarette package, the rate of decreasing smokers did not increase as much as the degree of referred risks.

·         In words, estimate the point of diminishing returns for the government.

In this website, government was showed various policies for reducing the rate of smoker increase. The more information of risk the government give to smokers, they are negligence it. It is like the diminishing returns for the government. The degree of appealing gets bigger but smokers didn’t decrease as much rate that we estimated.

Also, government would be to increase variable costs such as labour, advertising, and packaging for diminishing output. However, total supply would increase less and less. Demand may decrease due to the higher price.  

·         What are some other solutions that would increase the government’s production  (success) compared to their costs, thus lessening their diminishing returns?

In my opinion, creating new tools for letting know the smoking risks is one of the alternatives. The new ways that smoker can be shocked and motivate to quit smoking. Channel variation can enhance the success possibilities of the government policies. Moreover, changing target may be possible that not only smokers but young children before starting to smoke will be good way to prevent increase of potential smokers.

·         What implications are there in this article for the supply and demand of tobacco (Chapter 2 and 3)?

Because smoking is a habit really hard to quit, the demand of tobacco is inelastic.

Even thought the price changed largely, only small amount of changes in the quantity demanded happen. It means that only large price increase or decrease will diminish or increase demand because the demand is inelastic to price changes.

·         Explain the debate in terms of sin taxes (Chapter 4)

In the situation of increase in sin taxes, smokers feel big burden for purchasing inelastic product tobacco because there is no substitute product that becomes more attractive. In this reason, producers also cannot change manufacturing product because of no substitute products to transfer.