Market Failure And The Tobacco Essay Research

Market Failure And The Tobacco Essay, Research Paper

Market Failure and the Tobacco Industry

Any business or corporation in operation today is subject to market failure if they aren t already experiencing it. Market failure is the simple misallocation or the inefficiency of allocation of resources. This then results in waste or lost value that the company or business must endure and deal with. The source of market failure that I will be discussing are the external costs of producing tobacco products and imperfect information.

The source of the external costs is from the taxation that the government imposes on the various companies because of their pollution rates caused by their factories during production. Since the companies will be using factories to produce their products there will be one definite type of pollution which is air pollution. Since the supply of various tobacco products will be produced in mass quantities there will also be an abundance of air pollution coming from the factory. Today, air pollution is one of the biggest problems dealing with pollution. This single factor has been the main cause of many

world wide problems like acid rain, the green house effect, etc.. Since this has so many effects on the Earth and is such a problem any measure that can be taken, is being taken to reduce the amount there is. One of these measures that has been taken is for the government to tax the businesses that have pollution problems. This tax in effect forces the industry to lower its pollution rate or pay a tax. The factories have been given a certain standard that they must follow which is the limit of air pollution they can produce and if they are over it they will get taxed because of that. This tax is of coarse on top of a regular tax that must be paid for the simple fact that the factory does evitably pollute.

This graph shows the affects that excessive taxes have on the price of the product. The government has and is still intervening with this problem. They are doing this with various clean air laws and pollution policies that all factories and businesses must follow that will ultimately lower the amount of harmful emissions that are produced by various factories. This has been an exceptional step forward since 40-50 years ago. Although not too long ago pollution then wasn t thought about too much if at all and a factory polluted the air and ground without a second thought as to the repercussions that it might cause in the future. Overall the government regulations and taxes on the amount of pollution a factory is able to emit has worked very effectively. This type of pressure put on the factories and their owners has brought about less harmful emissions produced and new technology to make it even lower. The companies have also been forced to use as much of their resources as possible so as not to have too much waste which must then be disposed of. The one type of waste for the tobacco industry that is the biggest problem are products that can t be recycled the way paper can. This is usually the tobacco itself. Any type of tobacco that has been contaminated or is unusable for whatever reason must be disposed of and cant just be thrown away like ordinary garbage. This problem may not be as major and world threatening as bio-hazard waste produced by other factories but is still a problem for the tobacco industry. The second source of market failure for the tobacco industry is imperfect information. Imperfect information is the absence of full knowledge when making decisions, prices, etc.. One definite way the tobacco industry is subject to market failure through imperfect information is through the hiring of employees. When an employee is hired they are hired with the general idea that they will work well and efficiently. This also goes for the employees that are already there in the company. Simply this means that the employees cost the company money if they are goofing off at work and/or are not producing acceptable products. This is something that cannot be see when a person is being hired. This knowledge is learned as the person gets situated in their position and by then the company has already lost money. The company also loses money when they fire the person and have to hire a new person for the position. This is because while the company is in the process of hiring a new person the job that needs to be filled is empty. Since it is empty, the job is being performed by other people who are stretching between that job and their own. Unfortunately there is no way to keep this from happening in a This graph is to show the difference of productivity between two workers at the same job. company since it is impossible to know which worker will be an efficient one even after checking their references.

In all there is no way for the tobacco industry to get out of having some sort of market failure. This is one problem that the company must constantly work to reduce instead of eliminate. Even if there were to be absolutely no air pollution produced and the companies were to get computers to do all the work, the person who turned on the computers everyday would probably be late one or two days for whatever reason.


1. Case, Karl and Fair, Ray: Principles of Economics.

2. Graves, Philip: Health and Air Quality Evaluating the Effects of Policy.

3. International Finance Corp. Technical and Env . Department. Environment Unit: Investing in the Environment and Business Opportunities in Developing Countries

4. Kluger, Richard: Ashes to Ashes: Americas 100 year cigarette war, the public health and the unbiased triumph of Philip Morris.

5. Musselman library: various abstracts of articles

6. Taylor, Peter: The Smoke Ring: tobacco, money and multinational policies.



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