Price ceilings on alcohol and cigarettes: good idea?

[Machjo]

IN WWII, Canada's arms industry was suffering from a severe labour shortage owing to government demand for military hardware outstripping the ability of factories to find enough workers to meet the demand in the midst of a booming economy with full employment in all sectors.

The Federal government had thus come up with the idea of imposing price ceilings (Price ceiling - Wikipedia, the free encyclopedia) at the source on the sale of personal vehicles. The result was that, since factories building personal motor vehicles could only make so much in profit owing to these government price ceilings, many of them decided to switch to other industries, often defense contracting for military vehicles where such price ceilings were not in place and so where there was an opportunity for more profit; or alternatively they laid off workers who would then be able to find work quickly in the military-vehicle industries that could not keep up with the demand.

Of course this reduction in the production of personal vehicles along with the reduced price at which they were legally being sold resulted in a supply shortage for such vehicles. Those who intended to abide by the law found that while the price of personal motor vehicles was quite affordable, the cars themselves were always sold out with car salesmen unable to meet the demand, and of course this resulted in an illegal black market whereby a customer would pay the legal price for the vehicle over the table but would often negotiate an additional 'holding fee' or some other additional service fee illegally under the table for the salesman to hold a car for him when the next batch came in. Or alternatively the car salesmen would play favourites by holding the cars for friends and family members, or other contacts with whom they had a closer relationship.

Of course the government was aware that this price ceiling was causing corruption via illegal under-the-table charges and favouritism, but it concluded that that was a small price to pay to make workers more available to the defense industry.

I don't see why we could not apply a similar idea to cigarettes and alcohol. Essentially, by making it illegal for cigarette factories and alcoholic-beverage producers and retail salesmen to sell these products above a certain price, many of these factories would simply choose to reduce their production causing price shortages in shops no longer interested in selling these products at such a low price. We could add a twist to it too by also maintaining high taxes on them. This would give the industry a double whammy by not only keeping the price of these products up as is the case now, but also reducing profitability for these factories.

And yes, just as was the case with personal vehicles in WWII, we could end up with criminal activity whereby a customer might offer a store owner extra money under the table for him to hold a few cigarettes packs for him come next delivery day, or the store owner himself might hold some packs behind the counter for friends and family. But just as was the case with the personal vehicle industry in WWII, this would be a small price to pay when we consider that the primary objective of this would be to reduce the production and thus consumption of cigarettes and alcohol.

Any thoughts on this?

 

[AnnaG]

Personally I don't care how much the gov'ts tax drugs. I think it ought to legalize them all and tax them all.

 

[Machjo]

Personally I don't care how much the gov'ts tax drugs. I think it ought to legalize them all and tax them all.

But more specifically, what would you think of introducing a price ceiling on the pre-tax sale of tobacco products? A price-ceiling is not the same thing as a tax. In some respects it's even the opposite, as it would bring the legal pre-tax cost down, though granted the black-market cost would shoot up to compensate for shortages on store shelves.

 

[AnnaG]

But more specifically, what would you think of introducing a price ceiling on the pre-tax sale of tobacco products? A price-ceiling is not the same thing as a tax. In some respects it's even the opposite, as it would bring the legal pre-tax cost down, though granted the black-market cost would shoot up to compensate for shortages on store shelves.

Sorry. Brain fart.
lol I think those are a couple of the last things that should have price ceilings on them.
One of the first things is medical equipment for the chronic patients. Why does it cost twice as much for wheelchair tires in a medical supply store as bike stores charge, for instance? A friend pointed that out a couple years ago. And they were exactly the same tires, too. Why is it that organic foods cost bundles more than stuff that gets sprayed and treated?
Personally, I wouldn't care if cigarettes cost $70 a pack, let alone $7 (or whatever it is).

 

[Machjo]

Sorry. Brain fart.
lol I think those are a couple of the last things that should have price ceilings on them.

How so? Price ceilings discourage production, so certainly if the intent is to discourage the production of a product, then a price ceiling is an effective way to do so. Of course such legal price ceilings are elusive since what happens in reality is that store shelves experience a constant shortage of the product with people turning to the black market to buy them at higher cost; so in reality, a price ceiling raises the real (as opposed to legal) cost of the product and reduces its availability. But if reducing the availability of and accessibility to the product is in fact the goal, then a price-ceiling is an effective way to achieve this objective.

One of the first things is medical equipment for the chronic patients.

Are you sure about that? Read above.

Why does it cost twice as much for wheelchair tires in a medical supply store as bike stores charge, for instance? A friend pointed that out a couple years ago.

I don't know. Government-legislated price ceilings would not be the answer though, as is explained above.

Why is it that organic foods cost bundles more than stuff that gets sprayed and treated?

I buy organic too and it ticks me off to no end. But again I don't know the answer to the question. Is it tht the cost of production is higher. I'd worry about price ceilings though since that could potentially just discourage farms from getting into that business in the first place, thus making them even more difficult to obtain. Instead, a better solution might be to reduce my income tax and increase taxes on pesticides and artificial fertilizers. An income tax reduction would let me keep more money so that I can afford organic; and a tax increase on pesticides and artificial fertilizers would bring the real cost of products that have made use of them up.

Personally, I wouldn't care if cigarettes cost $70 a pack, let alone $7 (or whatever it is).

If the government legislated that the maximum legal pre-tax cost of cigarette packs would be 6$ let's say, then many cigarette companies might bow out of the market, and those that remain would not necessarily increase production owing to their profits being too low. This would cause a shortage in the legal market and so people would have to pay extra on the black market so that its real cost might in fact shoot up to 70$ a pack.

My intention in introducing a price ceiling would in fact be to achieve the opposite of the real intended result, just as was the case with price ceilings on cars in WWII (the government's intention was in fact to reduce car production).

So no, a price ceiling on medical supplies would not be a wise idea unless you'd want to pay twice as much as you do now on the black market or alternatively have to put up with shortages on store shelves all the time (a lower-priced product is of no use to you if it's always sold out).

Actually, I could see a beneficial psychological component to this. Let's consider price ceilings on rental apartments for instance. Many poor people might support it thinking 'yeah, my rent won't go up anymore and might even go down', and so they all run out and vote for the candidate who supports it.

As a result of the price ceiling, no one wants to build more apartments since there's not enough profit in it. And this results in apartment shortages resulting in people no longer able to find apartments, a black market whereby landlords charge a 'key fee' or start to charge for every little service, or start to give preference to white people, or friends of friends, etc. Before you know it, things are even worse for the poor, and then they're all clamoring to remove the price ceiling.

So we could apply the same psychology here. Smokers would all support the candidate who'd introduce price ceilings on tobacco products since it would bring the shelf-cost down, ignoring the fact that not as many producers would want to produce it. So yes, the shelf price would go down, or at least the pre-tax shelf price, but then shelves would be emptied half the time (more people buying the cheaper cigarettes and fewer companies producing them). So yes, the cigarettes would be cheaper, but not so available legally anymore, and the black market price would skyrocket. It would be a clever way to sucker voters who are smokers to vote for a candidate who appears to be on their side even though his real intention is to make cigarettes less available.

I can also see a drawback with this though: only the legal cost of the cigarette could actually be taxed obviously. So let's say the pre-tax ceiling is 4$, and the store owner charges a 'holding fee' of 10$ under the table for those willing to pay extra so that he keeps the cigarettes off of the shelves for when they come and pick the cigarettes up. Since the holding fee would be a black market fee, that part could not be taxed.

Another solution would be for the price ceiling to apply only to the factory, whereby the factory could sell at a maximum price but shops could resell at the price of their choosing. As a result, some shops might pay a holding fee to the factory, which the factory coudl use to produce more cigarettes. So to avoid that (since the objective is to kill the cigarette industry after all), we have a price ceiing on store shelves too, so that stores have not much interest in selling cigarettes either, and that way the holding fee would be with shop owners, and essentially the poor simply could not afford the exorbitant holding fee, and law abiding citizens might not be aware there's a holding fee, but simply feel frustration at the fact that when cigarettes arrive on Monday, they're all sold out by Tuesday with no resupply until the next Monday.

 

[Ron in Regina]

Interesting concept. I'm in Saskatchewan where (for the most part) the
only legal vendor of Alcohol is the Saskatchewan Liquor Board. Right
now I could go & buy a 40oz bottle of Canadian Made Whiskey for over
$40 in Regina, or buy the same bottle just across the US Border for
about $12 dollars.

A couple of years ago, a $10 retail pack of Canadian made Cigarettes
cost about $3 in the US...that's Saskatchewan's price vs. North Dakota
or Montana. These are Canadian made products I'm commenting on.

Would the government really roll the dice on the chance that it might miss
out on revenue on these products with reduced consumption?

Yeah, I know the argument about savings to the Health Care System with
reduced use of these products, but yet both are legally available for sale
in Canada with a HUGE mark-up once the taxes are factored in. The Cash
Cow to government with these taxes are as addictive as the products
themselves to whomever uses them...or they'd already be a thing of the
past, wouldn't they? If these products weren't as addictive as they are, then
the level of taxation on them by government just wouldn't be possible in the
first place.

I just can't see it happening. Either ban them outright, or leave it alone. One
or the other, but the middle ground is just 1/2 arsed at best and nanny state
engineering designed to fail before it starts creating more social issues at
worst.

 

[AnnaG]

How so? Price ceilings discourage production, so certainly if the intent is to discourage the production of a product, then a price ceiling is an effective way to do so. Of course such legal price ceilings are elusive since what happens in reality is that store shelves experience a constant shortage of the product with people turning to the black market to buy them at higher cost; so in reality, a price ceiling raises the real (as opposed to legal) cost of the product and reduces its availability. But if reducing the availability of and accessibility to the product is in fact the goal, then a price-ceiling is an effective way to achieve this objective.



Are you sure about that? Read above.

Dead sure. I read it.

I don't know. Government-legislated price ceilings would not be the answer though, as is explained above.



I buy organic too and it ticks me off to no end. But again I don't know the answer to the question.

But yet you seem averse to gov't intervention.

Is it tht the cost of production is higher.

How can that be? We eat organic foods and don't spend extra for herbicides and other such things. We buy seeds, water and weed gardens and collect the ripe stuff.

I'd worry about price ceilings though since that could potentially just discourage farms from getting into that business in the first place, thus making them even more difficult to obtain. Instead, a better solution might be to reduce my income tax and increase taxes on pesticides and artificial fertilizers. An income tax reduction would let me keep more money so that I can afford organic; and a tax increase on pesticides and artificial fertilizers would bring the real cost of products that have made use of them up.

Whatever works to keep people and companies from gouging.

If the government legislated that the maximum legal pre-tax cost of cigarette packs would be 6$ let's say, then many cigarette companies might bow out of the market, and those that remain would not necessarily increase production owing to their profits being too low. This would cause a shortage in the legal market and so people would have to pay extra on the black market so that its real cost might in fact shoot up to 70$ a pack.

Or they'd reduce the demand.

My intention in introducing a price ceiling would in fact be to achieve the opposite of the real intended result, just as was the case with price ceilings on cars in WWII (the government's intention was in fact to reduce car production).

Then it'd have to be done in a sensitive way. If it still didn't work, then another method should be applied.

So no, a price ceiling on medical supplies would not be a wise idea unless you'd want to pay twice as much as you do now on the black market or alternatively have to put up with shortages on store shelves all the time (a lower-priced product is of no use to you if it's always sold out).

So because medical supply companies were limited in pricing their tires, bicycle shops would close and everyone would have to buy from the black market? hhhmmmm

Actually, I could see a beneficial psychological component to this. Let's consider price ceilings on rental apartments for instance. Many poor people might support it thinking 'yeah, my rent won't go up anymore and might even go down', and so they all run out and vote for the candidate who supports it.

As a result of the price ceiling, no one wants to build more apartments since there's not enough profit in it. And this results in apartment shortages resulting in people no longer able to find apartments, a black market whereby landlords charge a 'key fee' or start to charge for every little service, or start to give preference to white people, or friends of friends, etc. Before you know it, things are even worse for the poor, and then they're all clamoring to remove the price ceiling.

Actually our gov't did put percentage limits on how high landlords could increase rents. We haven't seen people turning to blackmarket residences.

So we could apply the same psychology here. Smokers would all support the candidate who'd introduce price ceilings on tobacco products since it would bring the shelf-cost down, ignoring the fact that not as many producers would want to produce it. So yes, the shelf price would go down, or at least the pre-tax shelf price, but then shelves would be emptied half the time (more people buying the cheaper cigarettes and fewer companies producing them). So yes, the cigarettes would be cheaper, but not so available legally anymore, and the black market price would skyrocket. It would be a clever way to sucker voters who are smokers to vote for a candidate who appears to be on their side even though his real intention is to make cigarettes less available.

Woot

 

[Machjo]

Interesting concept. I'm in Saskatchewan where (for the most part) the
only legal vendor of Alcohol is the Saskatchewan Liquor Board. Right
now I could go & buy a 40oz bottle of Canadian Made Whiskey for over
$40 in Regina, or buy the same bottle just across the US Border for
about $12 dollars.

A couple of years ago, a $10 retail pack of Canadian made Cigarettes
cost about $3 in the US...that's Saskatchewan's price vs. North Dakota
or Montana. These are Canadian made products I'm commenting on.

Would the government really roll the dice on the chance that it might miss
out on revenue on these products with reduced consumption?

Yeah, I know the argument about savings to the Health Care System with
reduced use of these products, but yet both are legally available for sale
in Canada with a HUGE mark-up once the taxes are factored in. The Cash
Cow to government with these taxes are as addictive as the products
themselves to whomever uses them...or they'd already be a thing of the
past, wouldn't they? If these products weren't as addictive as they are, then
the level of taxation on them by government just wouldn't be possible in the
first place.

I just can't see it happening. Either ban them outright, or leave it alone. One
or the other, but the middle ground is just 1/2 arsed at best and nanny state
engineering designed to fail before it starts creating more social issues at
worst.

You do have some legitimate points. In the case of cars in WWII, well, first off it's not easy smuggling a car across the border, and since we were dealing with reducing labour demands in one industry, labour can't so easily just cross the border either. In WWII, this strategy worked like a charm on the car industry, but I do see the problem with cigarettes being much easier to smuggle across the border than cars and labour. Now if the US were wiling to get in on such a policy, then maybe it could work, but then the US would have concerns with cigarette smuggling across its border from Mexico, so it wold insist Mexico get in on the act, and so on down the line to Argentina. Probably it would need ot be a Pan-American strategy and that would take awhile to achieve, but could work in principle if all the Americas participated perhaps.

But highly unlikely I concede.

Unless of course we were willing to put up with some smuggling in exchange for it being difficult to access.

Dead sure. I read it.





But yet you seem averse to gov't intervention.

Except when it can potentially harm my surrounding environment. It's nice to be for small government regulation, but I'm sure ideas would change rather quickly if I decided to open up my very own coal-burning power plant next door. Pesticides get into our waters, which we can end up eating from fish we catch, etc. There is a legitimate reason for government intervention there.

 

[AnnaG]

Except when it can potentially harm my surrounding environment. It's nice to be for small government regulation, but I'm sure ideas would change rather quickly if I decided to open up my very own coal-burning power plant next door. Pesticides get into our waters, which we can end up eating from fish we catch, etc. There is a legitimate reason for government intervention there.

But not for gov't intervention between greedy capitalist and poor consumer. Interesting.

Actually I think just plain banning tobacco altogether except for medical reasons (complete with prescription from family MD), would be the thing to do. A lot of people would quit rather than pay the high price that black marketers would charge.

 

[Ron in Regina]

I'm not talking about smuggling, I'm talking about government gambling on
losing a cash cow. A shyte load of $$$ is made from taxing booze & smokes.

Great PR is made from making noise about this on a semi-regular basis, but
you can still pop out & legally purchase either product right now even though
the health non-benefits are widely recognized. Why aren't both of these products
already banned?

They cost the provinces (who most of the costs of health care have been dumped
on) big money, and yet, you can most likely purchase either product legally within
a few blocks (in a few minutes) of your home.

My point is that half measures don't cut it with addictive products like these. Either
ditch them outright & completely....or you just create more problems without
removing the original one.

 

[captain morgan]

I could go & buy a 40oz bottle of Canadian Made Whiskey for over
$40 in Regina, or buy the same bottle just across the US Border for
about $12 dollars.

A couple of years ago, a $10 retail pack of Canadian made Cigarettes
cost about $3 in the US...that's Saskatchewan's price vs. North Dakota
or Montana. These are Canadian made products I'm commenting on.

That retail price differential regarding booze and smokes represents the governments added cost through taxes.

Establishing a price ceiling would hurt the government the most.

Yeah, I know the argument about savings to the Health Care System with
reduced use of these products, but yet both are legally available for sale
in Canada with a HUGE mark-up once the taxes are factored in. The Cash
Cow to government with these taxes are as addictive as the products
themselves to whomever uses them...or they'd already be a thing of the
past, wouldn't they? If these products weren't as addictive as they are, then
the level of taxation on them by government just wouldn't be possible in the
first place.

The taxes raised through tobacco and booze far outweigh the healthcare costs.

 

[Ron in Regina]

Figured there had to be a reason these products are still available. Now lets ban them.
The Government can find a different way to collect those taxes evenly from all the
(this would include everyone once a ban is in place) non-drinkers & non-smokers.

 

[captain morgan]

There is one other option - Keep taxing the product to the point where the relative cost is prohibitive/ridiculous.

You're likely aware that this is what the government is currently doing - they have no interest in banning their cash cow quite yet.

 

[Ron in Regina]

There is one other option - Keep taxing the product to the point where the relative cost is prohibitive/ridiculous.

You're likely aware that this is what the government is currently doing - they have no interest in banning their cash cow quite yet.

That's pretty obvious and much more politically palatable than banning
both products and replacing them with, lets say, a flat $1000 net per
person head tax for every man, woman, & child in the country.

I'd be in favor of an outright ban on both products, and replacing it
with a Head Tax (with no exceptions...unless of coarse you happen to
not have a Head, I guess) spread evenly across every single person in
the country.

I think that would work to solve the booze & smokes issue (more or less),
but what government would do it? That's the big question...

Can you imagine a Politician selling a ban on booze & smokes, and the
replacement of that revenue with a flat net Head Tax?

"You have a big family? That's too bad, & a shame. You and the wife-type
have never smoked or drank, and have six kids? Phew...that's an extra
$8,000.00 net a year you get to fork over then. Oh well...no more annual
vacation trip to Disneyland for you....but there's no more booze & smokes."

If anything would help the many-many Alcohol & Tobacco addicts get past
their withdrawal issues, I think the above might be it. Laughter is the best
medicine I've heard. The (what would be) former addicts would all be net
financial winners with a Sin Tax becoming irrelevant due to an outright ban,
even factoring in a flat Head Tax. They could get over their withdrawal and
indignation with a couple of trips to the Caribbean each winter.

 

[Trotz]

Interesting concept. I'm in Saskatchewan where (for the most part) the
only legal vendor of Alcohol is the Saskatchewan Liquor Board. Right
now I could go & buy a 40oz bottle of Canadian Made Whiskey for over
$40 in Regina, or buy the same bottle just across the US Border for
about $12 dollars.

A couple of years ago, a $10 retail pack of Canadian made Cigarettes
cost about $3 in the US...that's Saskatchewan's price vs. North Dakota
or Montana. These are Canadian made products I'm commenting on.

Would the government really roll the dice on the chance that it might miss
out on revenue on these products with reduced consumption?

Yeah, I know the argument about savings to the Health Care System with
reduced use of these products, but yet both are legally available for sale
in Canada with a HUGE mark-up once the taxes are factored in. The Cash
Cow to government with these taxes are as addictive as the products
themselves to whomever uses them...or they'd already be a thing of the
past, wouldn't they? If these products weren't as addictive as they are, then
the level of taxation on them by government just wouldn't be possible in the
first place.

I just can't see it happening. Either ban them outright, or leave it alone. One
or the other, but the middle ground is just 1/2 arsed at best and nanny state
engineering designed to fail before it starts creating more social issues at
worst.

It's pretty much just Canada. Even when I was overseas in Europe I never paid as much as I do for a beer here. What's the point of even building a bar (except for pub grub) in Canada because the beers are always at least $5 + tip. :-?

Some US States actually subsidize local production of beer. That is something I would consider because at the beer store there is virtually no price difference between an import beer and a domestic (unless you consider a 30 cent difference in the 512 ML cans to be a big deal).

 

[Machjo]

But not for gov't intervention between greedy capitalist and poor consumer. Interesting.

Depends. You said the tires were identical. If so, why not just buy them from the bicycle shop? Do they have a natural monopoly on tires? If so, then I could agree with the government requiring them to gradually transform themselves into a consumers' co-operative, but to the best of my knowledge they are not a monopoly and so you always have the option of shopping around.

As for price ceilings, they do have some problems. You mentioned that in your town, rent ceilings are in effect. The negative impact does not happen overnight, but over time, if inflaiton continues yet the rent ceiling doesn't rise, gradually more construction companies will see no more profit in building apartment buildings, and so over time a shortage will occur, meaning that while the price of accommodation may be reasonable, accommodation itself might not be sufficiently available. Of what use if a good price if it's not available? Prices must be free to fluctuate, with the government not imposing ceilings as such, but rather structures that allow us to negotiate fair prices, as was described above in the case of natural monopolies.

Actually I think just plain banning tobacco altogether except for medical reasons (complete with prescription from family MD), would be the thing to do. A lot of people would quit rather than pay the high price that black marketers would charge.

Now that I can agree with; I was just trying to be moderate in the example in the OP as a means of gradually suffocating the industry.

Some US States actually subsidize local production of beer. That is something I would consider because at the beer store there is virtually no price difference between an import beer and a domestic (unless you consider a 30 cent difference in the 512 ML cans to be a big deal).

Subsidize beer? Are you nuts!? I don't drink beer myself (I'm a teetotaler), yet you expect me to subsidize your beer-drinking?! I don't think so.

AnnaG, if the concern is with the wealth gap, then I'd rather deal with it directly by raising taxes and directing that money towards the poor. I'm not saying it's necessarily a good idea, but if it was a choice between price ceilings and that, then I'd go for the tax option. Price ceilings distort free-market price value, and so are beneficial only when your objective is in fact to undermine a particular industry, as was proposed in the OP.

There is one other option - Keep taxing the product to the point where the relative cost is prohibitive/ridiculous.

You're likely aware that this is what the government is currently doing - they have no interest in banning their cash cow quite yet.

Yes, that could work too. But if you combine that with a price ceiling, then you're attacking it from both the supply end (taking profit out of production thus discouraging further production through a price ceiling for example) and the demand end (through increased taxes).

 

[Ron in Regina]

Yes, that could work too. But if you combine that with a price ceiling, then you're attacking it from both the supply end (taking profit out of production thus discouraging further production through a price ceiling for example) and the demand end (through increased taxes).

Does this really happen though, or is it just another politically palatable
revenue scheme? Here's an interesting read:

http://mercatus.org/sites/default/files/publication/MOP55 _Taxing Sin_web_fixed.pdf

I still say, ban them outright. It's an honest way to deal with the issue if the goal
is to punish the manufacturers of Tobacco & Alcohol products. The Government
can find another way to tax its citizens. Of that I have no doubt. :lol:

 

[Machjo]

Does this really happen though, or is it just another politically palatable
revenue scheme? Here's an interesting read:

http://mercatus.org/sites/default/files/publication/MOP55 _Taxing Sin_web_fixed.pdf

Just to clarify, a price ceiling would actually hurt government revenue from thse products, so if the goal is to increase government revenue, that would not be the way to go about doing it. However, if the goal is to reduce consumption of these products by making them less generally available as a public health issue, then it's a very wise move.

But I do agree with you that perhaps the best solution is to just ban the stuff outright, unless we'd want to look at a more gradual approach.

 

[JLM]

Personally I don't care how much the gov'ts tax drugs. I think it ought to legalize them all and tax them all.

I agree 75% BUT you'd have the additional problem of the people who don't do drugs because they are illegal, starting to do drugs. The thing I don't know is how many people that would entail.

 

[Machjo]

Ron, thanks for the link. It presented some good points. So maybe sin taxes can cause more harm than good in some cases. I guess only education can solve this along with some personal responsibility.

So, do we privatize health care? I don't know, but when I see people with such unhealthy lifestyles, I do lean in that direction big time.