This (er, Last) Week in "Duh": Price Hikes Work

In modern economics (slash for the purposes of this post), price hikes have two effects:

1. Discourage consumption
2. Encourage consumers to seek lower-priced substitute goods

Politicians like to think they can operate in an alternate reality where the basic laws of economics don't apply.  Of course, since most of their constituents also like to think they're immune from these very same laws, the pols get to act all surprised when their best laid plans invariably go to hell, but thats another story for another time.   From Monday's WSJ:

Politicians in Annapolis are scratching their heads wondering what happened to all those chain smokers who were supposed to help balance Maryland's budget. Last year the legislature doubled the cigarette tax to $2 a pack to pay for expanded health-care coverage. Eight months later, cigarette sales have plunged 25% and the state is in fiscal distress again.

Amazing, all it took to get people to buy less cigarettes (not smoke less, per say), was to make cigarettes more expensive.  Of course, the best laid plans of mice and men oft' go awry, all that much more often when the men in question happen to be politicians.   

A few pols are pretending to be happy that 30 million fewer cigarette packs have been bought in the state so far this year. As House Majority Leader Kumar Barve put it, fewer people smoking is "a good thing." Yes, except that Maryland may be losing retail sales more than smokers. Residents of Maryland's Washington suburbs can shop in nearby Virginia, where the tax is only 30 cents a pack, and save at least $15 per carton.

And herein lies the beauty of politics: Despite the fact that Maryland's legislation was inherently flawed and doomed to fail from the very beginning, the fault lies not with the State's elected officials, but with those uncooperative bastards from the neighboring states.  Rule #1 (or is it #2?) of politics: make sure you can always, ALWAYS blame the other guy (who(m)ever that may be). 

While we can never be 100% certain, the sad(est?) part is that most of the brain trust that is the Maryland Legislature probably thought it was a good idea.

Funny how basic economics works.

Duh.

(note: This post was started back on 8/12, its just...uh...yea took a while, deal)

Comments

[Calgary Schmooze]

You might need more red-hot data for analysis to come to full conclusion... where are the smoking polls asking smoking pols about smoking poles?

All puns and double entendres intended.

[TheUnrepentantGunner]

Well, stupid of the maryland legislature to assume their revenue would double.

But the good news is this, at least their revenue is up.

If sales were x with $1 in taxes, and .75x with $2 in taxes, 2 * .75 = 1.5x, a 50% increase, and thats not a bad thing, especially if it long run lowers health care costs.

Like everyone else on 1-2, I don't care for taxes. But if we have to have them to pay for our military, our schools, policing etc etc, I would much rather tax cigarettes than alot of things, though I still really think we need to have the fatty food tax.

The positive externalities are priceless.

[Anal_yst]

@ gunner

That may be true ceteris paribus, but when they budgeted for a 100% increase, they've still got a nice shortfall on their hands.

They've also made it illegal to have more than 2 packs bought out of state on you, so at least they've figured out a way to make up for the lost revenue...

@ Schmooze
I've been thinking that needs more primary research, I've gotta bachelor party down in South Florida in Oct, I'm sure I'll have an update after that.

[Matt]

You might want to replace 'politicians' with 'socialist/progressive/fairness-loving/big government politicians' or maybe just 'model day liberal politicians.'

[miami]

'per say?' Snort. Love the link though.

[Anal_yst]

@ miami

Whoops! Thats why writing with a massive headache (the cause of which I'll leave you to ponder) isn't a good idea

[reverse cell phone lookup]

Not to mention (and someone correct me if I'm wrong),