In to gain a significant amount of revenue

In the UAE, the government is increasing the price (adding a tax) of cigarettes and sugary drinks to move people away from unhealthy products because it puts a strain on the health services and has an negative impact on people’s health. Not only are they known to risk the consumer’s health, but also to the people around them. This is known as a negative externality in which smoking and drinking sugary drinks affects the society. For example, smoking around other people will affect the health of the people around the smoker inhaling the smoke (second hand smoking). In the Diagram 1 above, represents the consumption of negative externalities in a free market. As the consumer begins to increase their benefits (MPB) at the point where it equals the society’s benefit (MSB), the consumer begins to ignore the negative externality that is created at this point. As shown in Diagram 1, the consumer will begin to over consume the harmful goods at Q1 at the price of P1, and will cause an overconsumption from Q2 to Q1. Thus, creating the MSB to be less than the MSC, and generating a welfare loss. Therefore, a market failure. To reduce the consumption of cigarettes and sugary drinks, the government of the UAE has imposed a tax on cigarettes and sugary drinks. As shown in Diagram 2, this would cause an upward shift in the supply curve from MSC to MSC + tax. Thus, increasing the price from P1 to P2, and therefore causing a decreasing the the quantity demanded from Q1 to Q2 and eliminating the welfare loss. Due to the law of demand, people will consume less of the product because it has become more expensive. However, cigarettes are an addictive good and the demand for cigarettes are price inelastic. Therefore, increasing the price of cigarettes will likely not reduce the quantity consumed by much. In addition, the government will be able to gain a significant amount of revenue because cigarettes are price inelastic, and will be able to create public programs to help end the negative externalities. As said from the article, people with higher incomes are more likely to not stop smoking or decrease drinking sugary drinks, than people with lower incomes. Because of the increase in price, lower income people may give up on smoking because they are not able to afford much of it. With the revenue produced from the taxes, hospitals and clinics have called in to have them be spent to programs in schools to improve and support smokers to quit smoking.  On the other hand, imposing a tax on sugary drinks would create an inward shift in the supply and would cause a decrease in producer revenue because the demand for it would be decreased. The firms would then have to reduce the spending on the factor of production of labor, because with the low demand for sugary drinks there will be a reduction in supply. Thus, there would be a need for less employees to produce these drinks and lead to unemployment. A solution to reduce the consumption of sugary drinks, other than imposing a tax, is to subsidize the healthier substitutes to sugary drinks, such as fizzy flavoured water. However, it is difficult to determine if people will consume the healthy substitutes because each person has a different preference. A research of the XED of sugary drinks will have to conducted to determine the implementation of the subsidy.Moreover, a solution to reduce cigarette smoking, other than imposing a tax, is to create non-smoking areas throughout the public areas in the UAE. Smokers will not be able to smoke around a certain distance in these areas, such as schools and businesses. If they are smoking around the public areas, then they will be fined. However, it is difficult to monitor everyone if they are smoking around non-smoking areas and will use much of the country’s expenditure. As said from the article, with the revenue produced from the taxes, hospitals and clinics have called in to have them be spent to programs in schools to improve and support smokers to quit smoking and decrease the consumption of sugary drinks as a long term solution. People will then tend to stop smoking and drinking due to the awareness of the negative effects to their health. Therefore, this causes the MPB curve to shift inward and moving closer to the MSB, thus, creating a more socially efficient market.