03 Jun Question Section 1 Headlines of people and companies suing toba
Question
Section 1
Headlines of people and companies suing tobacco makers are nearly an everyday occurrence.
More and more smoking is becoming less cool as the dangers of the drug are becoming
clearer. Yet despite the costs of this habit, nearly 25% of adults still smoke, helping fuel one of
the largest industries in America. The following graph illustrates the decline of people who
smoke throughout the years CDC graph
History:
Cigarettes and tobacco has a quite unique history. Over 6000 years ago tobacco became
popular due to the beliefs that it could cure almost anything. This idea was popular until the
1500s and is the cause of tobacco spreading throughout the world. This worldwide popularity
served the early United States well due to the large crops of tobacco in the colonies and was
used for a large part of the funding for the Revolutionary war. Not long after the product was
found to be dangerous and addictive. Scientists found that nicotine was a poison as early as
1826. However the demand for cigarettes grew and grew, finding a height in the two World
Wars. Cigarettes were freely distributed to soldiers overseas (sometimes even part of the food
ration), which led to the popularity and sales of tobacco products during the wars. Soldiers would
come back and be healthy customers for the large tobacco companies. During the 1950s more
and more evidence was found that smoking caused lung cancer and soon after in 1964 the first
surgeon generals warning on cigarette packages was seen. As more people realize the danger
of the product, smoking is gradually fading from popularity and major lawsuits are taking place
to
hold the tobacco companies responsible for their products. The tobacco timeline
Company Makeup:
Tobacco companies today are very powerful and few in number. Phillip Morris and RJ Reynolds
control over 75% of the United States cigarette market (Phillip Morris website). These two
companies basically form an oligopoly. They offer very similar products and between the two
they control most of the market share. However, these companies for the most part have not
formed a cartel because there is a lot of competition between them. They spent billions each
year on advertising, lowering profits for both. This behavior is contrary to that of a good cartel.
Also, these two companies have diversified over the years in an attempt to avoid some of the
attacks on the cigarette market. Phillip Morris also runs Miller Brewing and Kraft foods. RJ
Reynolds also has business on kitchen products (Reynolds wrap aluminum foil) and also own
Nabisco. This diversification is partly to downplay the tobacco production of the companies
which is currently under fire. Also, the companies are preparing themselves for the future, in
which cigarettes and tobacco might prove too costly to produce. However, despite this
diversification in the cigarette businesses, tobacco is still a huge commodity to the United
States. In 2006, there was $90 billion in tobacco products sold in the United Sates. This is vital
to many of the southern states where a large percentage of tobacco is grown. North Carolina
and Kentucky accounted for over two-thirds of this production. Tobacco remains a vital part of
the economies for these states.
Externalities:
Cigarettes and the tobacco industry are plagued by many negative demand externalities. The
major one they encounter is the health risk associated with them. More than 400,000 people die
every year due to various cancers, heart diseases, and strokes caused directly from smoking.
This significant health risk has been ignored for years but is starting to become a serious issue.
Many other negative externalities are faced by smoking and smokers, such as not being able to
smoke in most public buildings and many people find the smell of smoke on someone
disgusting. Also, many of the more positive externalities of demand, such as being cool if you
smoke, are being destroyed as only a myth to encourage people to smoke. Gone are the days
of celebrities promoting smoking. Now they hide the fact, as it is almost a public
embarrassment. The following illustrates this negative demand externality. A downward
slopping demand curve D represents the private value of cigarettes. However because of these
negative effects, the social value is much lower (represented by another downward slopping
curve D* below the D curve). This lowers the price and quantity sold. To help negate these
effects, the government internalizes the externality, by taxing the product. Cigarettes are taxed
heavily, with taxes representing about one-third of the price of a package (Center for Disease
Control Website).
Most of the production externalities are positive for tobacco companies. Tobacco represents a
large cash crop and puts a lot of people to work. Tobacco is grown and made relatively pollution
free. The economies of many localities are dependent upon tobacco. Overall, the production of
cigarettes and tobacco create jobs and bring in money for localities.
Problems for the market:
Smoking as a market is currently facing trouble. Large class-action lawsuits are in place against
the tobacco companies in an attempt to compensate for losses due to the illnesses that tobacco
causes. States are beginning to score big in the courtroom with cigarette companies. This
month alone, Pennsylvania and New Jersey were paid roughly $336 million (Philadelphia
Inquirer). Many other states are receiving similar payments. Eventually, these costs will bankrupt
the tobacco companies.
The industry has been criticized for years about targeting minors with their product. Joe Camel,
until he was discontinued in 1997, was just as recognizable to six year olds as Mickey Mouse or
Ronald McDonald. Also, 91% of six year olds could correctly link him to cigarettes (American
Medical Association website). Almost 100 million packs of cigarettes are sold to minors every
year, all illegally. This makes the market a largely illegal one as a large percentage of its users
are underage. The following chart from the CDC website shows the ages that people begin
smoking daily. Roughly three-quarters began smoking daily before they were of legal age to
smoke.
Conclusion:
The market for cigarettes and tobacco has a rich and important history. Despite still doing a lot
of business, the market is in a decline and heading for trouble. Problems with its illegal target
audience and cancer-causing product will catch up to the market and drag down its profits. With
more negative externalities then positive ones, cigarettes also face other challenges. All this
adds up to a questionable future for an industry that was once vital to our country.
Section II
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