Demerit goods are goods that are usually overproduced and cause negative

externalities. These goods for examples are tobacco and alcohol and taxes are usually put up to
dercrease the overprovision and reduce the deadweight loss. Sin tax is a form of tax that is
directed towards goods or services that generate negative externalities. This tax is usually
targeted towards goods such as alcohol, tobacco, soft drinks and fast food. this is probably due
to health risks or safety issues caused by the goods when consumed or produced. in Manila,
the government is planning on tackling the issue of high smoking rates by increasing the cost of
cigarettes by more than 100% through sin tax. this can be shown through an illustration of a
diagram.

The diagram shows the market of tobaccos at equilibrium at supply curve S1 and
demand curve D at price P1 and quantity Q1. After the government enforces the tax for the
production of tobacco or cigarettes, the production cost for tobaccos increases by 89 cents per
pack, shifting the supply curve to the left to S2 and the demand curve contracting causing a new
equilibrium to be formed at price P2 and quantity Q2. this means that less people are willing and
able to buy cigarettes and therefore reduce the amount of smokers.
even after adding the tax, the Philippines is still considered to be one of the country with
a low production cost for cigarettes compared to it neighbouring country, singapore. a pack of
cigarette in Philippine is about an eighth of the price of the same brand in Singapore. however,
this is probably due to the high living standards in Singapore compared to Philippines where the
income group is low
Even after adding the tax, the Philippines is still considered to be one of the

country with a low production cost for cigarettes compared to it neighbouring country,
singapore. a pack of cigarette in Philippine is about an eighth of the price of the same
brand in Singapore. however, this is probably due to the high living standards in
Singapore compared to Philippines where the income group is low
Price elasticity of demand is the rate of change of quantity per rate of change of
Price of a good. The lower the PED of a good, the lower the amount of people who are
not willing and able to buy the good. After the tax is added, people with high income in
the Philippines will not be affected much due to the low price. this means that the PED
for high income smokers is fairly low. Low income smokers however will suffer the
raise in price due to tax hike, meaning that their PED for smoking is slightly higher than
high income smoker. A pack of Fortune for example costs around 68 cents. after the tax
is applied, the price will increase to $1.49, more than doubling the price.
According to the director of the Framework Convention On Tobacco Control
Alliance Philippines( FCAP), most of the smokers are from the low income society. By
increasing the tax rate for smoking, the amount of smokers will reduce, increasing their
disposable income for food, shelter and education, not to mention reducing smokingrelated diseases, both from smokers themselves and from second-hand smokers.
The revenue that the government generates from the sin tax can be used for
spending on healthcare for people that are suffering from smoke-related diseases. The
revenue and also be used for education and awareness campaigns for people about the
dangers of smoking to discourage people from smoking, decreasing the demand for
cigarettes or tobacco, shifting the demand curve to the left.
However, if the tax is induced, production cost for tobacco would increase,
making the producers less willing and able to supply workers. This means that
thousands of people who work for the tobacco industry would lose their jobs. As a
results, the unemployment rates would increase, thereby causing economic downfall.
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