“Knowledge is power. Information is liberating. Education is the premise of progress, in every society, in every family.”


Surbhi Bhatia I.P. College, Delhi University



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Surbhi Bhatia

I.P. College, Delhi University


The common notion: Legalization of drugs doesn’t go down well with people. Majority still believes that it will increase the amount of drug usage in our country and that by making it legal, people who haven’t tried it before might want to indulge as there wouldn’t be a law governing their fear.
The gut instinct is that demand would increase in the short-term, as the penalties for being caught go down (to zero) and the drug should be easier to attain. Both of these factors suggest that in the short-term, demand should rise. And one cannot simply put the blame on the masses for having such stereotypical beliefs. After all that’s what our bollywood movies have endlessly taught us over the years. The Police officer ignores the would-be-buyers and gets into the jeep right after the pusher. After a good chase of overtaking the other cars and shooting bullets, the officer captures the miscreant with a high Krishh-type jump over half a dozen cars lined up in a jam that ends in a perfect landing. But that’s not the end. The real target is the supplier, smuggler. And needless to mention, a deal is made – Exemption from the punishment in return for the name of Mr. Mafia!

Like it or not but that’s what has influenced our thought processes, society and the economy. Why the supply side approach- trying to reduce the supply and not the demand, heavy penalties for the suppliers and not for the people who buy it even if that means living in a society that breeds addicts; is not good is because billions are spent every year as expenditure on prohibition enforcement – arrests, prosecution and incarceration. Legalization would reduce this deficit and will allow government to collect tax revenues on legalized sales. Not only that, drug related crimes are the external costs related with drugs. By decreasing the supply and creating a shortage, murders, mugging and mayhem will increase for sure since the addicts have an inelastic demand. The price does not bother them.

If the focus is shifted on demand – A drop in the demand will create a supply side generated surplus in the market as a result of which the prices will go down. With quantity and price both low, the total revenue shall also fall along with a drop in associated crimes. But how would this demand fall? Education and awareness, drug treatment programmes and rehab centres would come to our rescue here. Alternative occupation possibilities and training and making sure the low income group has a reasonable employment and educational level will push down the demand. Embracing information, public awareness, early intervention, counseling, treatment, relapse prevention can reduce the demand for drugs tremendously.
As long as there is demand, someone or the other will supply. Therefore the focus should be shifted on tapping the demand instead of supply. Humans have always been tempted by the ‘forbidden fruit’ since the time of Adam and Eve. It is quite possible that once drugs are legalized for a period of time, they will no longer be seen as ‘cool’ by the rebellious youth and the demand might actually plummet. Imposing taxes can also help keep a check just in case the usage is increasing. There’s a difference between what is easy and what is right, it’s high time we all make a call.

I predict a riot

Sonali Chowdhry


‘Ethnic riots sweep Assam as the clash continues between the indigenous Bodos and the Bengali speaking Muslims.’

‘Violence erupts in Greece as anti-austerity protestors clash with riot police ahead of key vote on spending cuts.’

‘The battle for London- the madness spreads as unemployed youth, the product of a crumbling nation and an indifferent political class riot and pillage.’
Headlines such as these accompanied by images of burning buses and vandalized private property often emblazon the front pages of our newspapers. Some puzzling questions linger on in our minds- what goes on in the mind of the rioter? Are they even rational thinkers? Could there be a rational decision making process which determines whether an individual remains neutral or becomes a member of the rioting mob? These are the questions I seek to explore.
Starting with a basic definition-an individual is rational if his/her preferences are utility maximizing, internally consistent and if he/she seeks to maximize the net gain in the most efficient manner possible. At first glance, riots defy any rationale. What could drive a person to participate in such destruction, knowing the high costs involved for the nation as well the individual? Two economic theories attempt to explain the decision making process involved- the riot threshold model and the dual processing model.

The Riot Threshold Model

According to this model, the following relation determines the mechanism by which an individual decides whether to participate in the riot or remain neutral.



G = R + E(n) - P(n) - I – C

G= Net gain (or loss) to individual from participation in the riot rather than remaining neutral.

R= Private revenue and reward (e.g. income, power) to individual for participation in the riot.

E= Emotional benefit from participation

P= Penalty imposed on individual for participation in riot.

I = Potential for injury suffered in action.



n= Expected number of persons participating in riot at time of evaluation and decision.

C= Cost of individual's time and other resources

  • (R)- Private revenue and reward is independent of the number of people expected to participate as it depends on the individual’s ability to steal, pillage and hold on to the looted goods.

  • (E)- Emotional benefit derived through the rush of emotional excitement and gratification is increasing in ‘n’ due to the increased acceptance and encouragement by the group. E’(n) 0

  • (P)-As the mob size grows (n increases), the probability of facing a penalty decreases as it becomes increasingly difficult for security forces to effectively stop and penalize the entire group as a whole, giving participants a chance to hide within the numbers. P’(n)<0

  • I)- As the number of rioters increase (n increases), possibility of injury could theoretically decrease (due to participant’s ability to hide within the numbers) OR increase (greater chances of a panic run or fatal stampede). Thus in this analysis, I is kept constant.

  • (C) - personal opportunity costs of time and effort invested by joining the riot is independent of how many others participate i.e. it is independent of n.

An individual will become a rioter if and only if the benefits of participating (rewards and emotional benefits) are strictly greater than the costs involved (possible penalties, injuries and opportunity cost of time and efforts invested).

R + E(n)  P(n) + I + C

As n increases,



  • emotional benefits (E) are increasing

  • potential for penalty (P) is decreasing

Thus, as the number of people participating in the riot increase, net gain of participation (G= R + E – P– I –C) increases as R, I and C are constant. Beyond some n=n*, perceived benefits will exceed costs and the person will want to participate. Thus, an increase in number of people participating increases the probability that another person will join. This explanation is consistent with rationality as rioters undertake a full and deliberate cost benefit analysis to form their decision and do not regret their decisions later on.

The Dual Processing Model

This is another model for understanding the decisions of a possible rioter who is presented as less rational as compared to the previous model.


During the riot situation, the stress levels are high and sufficient to restrict thinking to a short sighted intuitive level. Thus in a riot situation, a person tends to reason ‘intuitively’ and not ‘deliberately‘ focusing on short-run costs and benefits (the instant emotional and monetary gains) while long-run costs such as damages to infrastructure, possible penalties imposed by authorities and injuries are discounted or ignored. Thus intuitive thinking dominates over deliberate and reflective reasoning and it may result in individuals holding a preference to participate in the short run. The period after the riot ceases has lower levels of stress and involve both intuitive as well as reflective reasoning in the decision making process. This could explain why many stories of regret emerged among the accounts of those participating in the 2011 London Riots as the full long run costs and consequences of riotous activity are realized.

This area of decision-making is yet to be extensively researched on but nonetheless the two above mentioned models present some striking ideas. The participation of an individual in such riots doesn’t stem from a surge of irrationality and a suspension of optimizing behavior but may, in fact, involve a conscious consideration and evaluation of the pros and cons associated with riotous activity.



Understanding ‘Gangnam Style’- Economics Style

Mahima Malik

I.P. College, Delhi University


I work as a finance lawyer, and I’m paid very well (Rs.70,000 approx). My colleagues and I work all day long with investment bankers and private equity people who make more than Rs.1 lakh ),so I feel poor’

I’ve been a proud owner of a Samsung champ s300 phone for over two years. Well, I was, to be real. With all the iphones and Blackberrys and the Ericsons -the gamut of the highly privileged devices that command respect – this champ surely shrinks to a chimp! And that is the power of an exogenous force –which productively shapes our perceptions and even actions. One of the major drivers of an economy is competition –there is interplay of forces in an economy- wherein not only the producers but also the consumers, in a way, constantly compete.

Relative poverty is a conception that people are poor when they are very much worse off than other people in a society. As living standards rise, the level at which people are said to be poor also rises. More aptly, it is the deprivation of certain comforts of life of some people in relation to others.

In the famous article –Catherine Rampell explains the notion of relative poverty. In her study, she visions a society being something like a long street running up a hill, wherein rising altitude implies rising income. And each person evaluates himself/herself relative to his/her neighbours on a horizontal basis (which implies similar income group). But as income rises and the income differences become more pronounced in the same community, what people end up doing is a vertical comparison; precisely an upward one (which relates to different income levels-which is not reasonable). The reference of this hypothesis here is apropos-in the above statement, even when the lawyer is objectively satisfied with his salary, the resultant discontent is because of the comparison with his uphill neighbour- the banker. This gets even more aggressive in an unequal world, as in an egalitarian society, people find other relevant (personal) yardsticks to define their well being. Per se, Conspicuous consumption –of products that are a mark of status and class- become more pronounced as the income ladder reaches new heights, as in a developing economy characterised by rising income levels. This manifests into a full grown paradox- a society where the ‘winners are whiners’!

In the wealth of nations, Adam Smith identifies the inherent problem in concept of relative poverty through the famous linen shirt example- if you cannot afford a linen shirt ,but not being able to afford a linen shirt marks you out as being poor, then in that society you are poor if you cannot afford a linen. When defining poverty in relative terms, it does not reflect the real poverty. Nonetheless, understanding relative poverty puts light on the exogenous factors influencing the demand of consumers for certain products and explaining consumer ‘misbehavior’ to a decent extent.

One such is the curious case of demand for counterfeit (fake) products. Ask a label ho-“Jimmy Choo?”, and pat will come the reply-“Jimmy Who?!” Fake products are not fabulous, clearly not fashion and are not even a centimetre close to classy. Fakes have little or no quality or control standards, one does not know where they are from, and if there is any problem, no one will give a hoot. They pose serious threat to manufacturers and retailers of authentic designer products. The range of associated irregularities is indefinite, and so, their demand seems incomprehensible. In his pursuit to fit the bill of the cool and the snazzy, customers overtly buy ‘knock offs’ of big brands. After all, imitation is the best form of flattery. Here, not so much. The demonstration effect is at work- if your budget constraint is too constrained to own Prada, Gucci, herms, Apple, Rado, Eterna-simply ditch the highroad. They are willing to part their cash for fakes but not local goods. Counterfeit goods take up approximately 6-10% of world trade- and that is a lot!

With the rising level of income, standard of living increases which in turn imply the greater incidence of conspicuous consumption .The term ‘deprivation’ becomes broader and complex, as the meaning of ‘necessity’ has an attached subjectivity. The new mantra is-‘It’s in vogue to spend money’; the Gandhian doctrines of altruism and simplicity are not coming back and the flamboyance is here to stay. Comparison is imbibed in the human psyche and the notion of relative poverty, though not all embracing, is understandable. And now we clearly know the ‘economics inspiration’ behind South Korean artist, PSY’s single, ‘Gangnam Style’ –which is a critique of conspicuous consumption in Korea in general. It pokes fun at people of Gangnam, Seoul who try to exude a certain supposed “class” .The song is more than just a plump, funny Korean guy dancing a funny step- it unwittingly teaches economics!

Applying Feminist Economics to the Education Sector

Amrita Garai

Education is not preparation for life; education is life itself.”



~ John Dewey

Economics has influenced our perceptions about not only markets and material goods, but also about political and social institutions, such as education. Economic concepts of self-interest, scarcity, maximization, choice, efficiency, value, and competition, originally developed to understand market transactions dominate education policies. Therefore, education economists apply economic constructs to analyze the outcomes of educational investment and the creation of human capital through education.


Certainly the economic model is appropriate for the business side of education and both both economics and education seek to increase well-being but neoclassical economics’ narrow framing of human character, human purpose, and means to achieve well being, are ill suited to convey the complex and transformational goals of the education sector.[1] The goals of educators include not only teaching people cognitive material, but also, more broadly, helping them to fulfil their human potential, initiate an examination of the meaning of their lives, and fulfil their sense of duty and responsibility.


The Evolution of Feminist Economics
The feminist critique began for the purpose of improving women’s economic condition. The first feminist economists were John Stuart Mill, Harriet Taylor, and Barbara Bodichon working in the period of the 1840s through the 1870s to theorize women’s equality in employment and property ownership. Since then feminist economists have questioned the social constructions of traditional economics, the extent to which it is positive and objective, and provides a tempered form of the prevalent economic constructs.
Feminist economics has emerged with an alternative perspective about the education sector which takes into consideration both the economic and holistic approaches to education. It critiques the three economic constructs that dictate the economics of education and expands it to include teaching practices that are more consonant with the goals of educators.


  • Scarcity and Consumption

Scarcity is essentially defined as a situation in which needs and wants of an individual or group of individuals exceed the resources available to satisfy them, which then leads to competition. This has been one of the most integral assumptions of economics and has been integrated into the education system by educators worldwide by creating a scarcity of good grades and therefore competition for those grades. The purpose was to foster competition (preparing them for the work scenario where they would be exposed to keen competition and extrinsic reward system) and providing the students with incentives to learn better. Consequently, this grade competition does not promote cooperation in the learning process. But there is no substantial proof to suggest that competing for grades is a better way to learn than co-operation which encourages an unconditional exchange of knowledge.

Educators have essentially created a zero sum game where the students who help others to learn may reduce their own grades. For example, a student with ‘A’ grade might be willing to help a C or D student because that would not reduce his payoffs but he definitely would not help a B or fellow A student. This attitude inhibits beneficial peer learning.

Robert Slavin (1990) reported that as long as cooperative learning incorporates individual accountability as well as group goals, there are considerable positive effects of cooperative learning methods on student achievement as compared to the achievement of students in a competitive structure. Reduced competition results in more learning by more people (through peer effects as well as through more powerful motivation).

Competition for grades inevitably leads to a conflict between private and social interests, promoting Nash equilibrium as opposed to Pareto efficiency. Pareto efficiency through cooperative learning maximizes the joint welfare of the students which is undoubtedly better for the society and is consonant with the goal of education.





  • Efficiency

According to neo classical theory, education system is viewed in terms of a production function where the “output” is knowledge, produced by a series of “inputs,” the human and capital infrastructure of the education system. Therefore, efficiency in education would be to maximise knowledge. But how do you measure knowledge?

Feminist economists argue that the strategic standardised tests that measure cognitive knowledge are at best an approximation but not conclusive proof of the retention and proper utilisation of the acquired knowledge. The fault lies not only in the examination system (that encourage short-term cognitive recall) but more importantly in the way efficiency of education is defined and perceived.

A great deal is lost when efficiency of knowledge production becomes the watchword in education. Creativity does not march to the drum of efficiency. Neither does the attainment of wisdom.” Myra H. Strobers

Efficiency in education should not be restricted to the maximisation of cognitive knowledge but should include affective knowledge, emotional intelligence and social skills. Although such variables are difficult to measure nevertheless they should not be completely eliminated from the curriculum. Feminist pedagogy advocates a cooperative setup where factors like class participation; group discussions etc are also evaluated.




  • Value and Well Being

Adam Smith recognised two types of value: use value and exchange value. Exchange value is the price that a good or service commands in the marketplace. Use value, on the other hand, is the value of a good or service to an individual, regardless of its exchange value. Economists divide the value derived from education into three categories: investment benefits to the individual (exchange value), consumption benefits to the individual (use value), and benefits to society - the external benefits (exchange value). Use value is ignored and exchange value is then equated with value itself on the grounds that economics is interested only in economic value and economic well-being and exchange value comes closes to measuring these concepts.

Therefore, mainstream economists consider education an investment activity, where investment benefit (income) is the return to the investment (fees and time invested). Education increases the individual’s productivity which then translates into increased earnings. This increase in earnings is then interpreted as an increase in well-being although economists agree that it is not an exact measure.

Traditional economic constructs have also influenced the budget allocations of the education sector. Subject areas that are associated with earning a living receive the greatest proportion while those subjects that are not associated with vocational development are often starved for resources. For example, since few people earn income by pursuing music and art, these subjects are thought to yield merely consumption benefits and are far more likely to be targeted for budget cuts than math and science, which are viewed as central to preparation for work. In higher education, the humanities suffer at the expense of the sciences.[1]

Feminist economists have challenged this notion of value and well-being. As Myra H. Strobers pointed out, “The struggle to view education as important beyond its human capital investment implications is tied to the broader struggle to stop equating well being with income or GNP.”



Moreover, exchange value is not the same as value. Consumption benefits, which include development of emotional and social aptitude, are integral considering building a better society and furthering democracy are one of the primary goals of public education. The emotional and cognitive rewards of community service and the understanding students develop about the non-economic assets of members of the community who are not financially well off are viewed by feminist economics as critical benefits as well despite the fact that they may never be used to create exchange value in the labor market.
In summary, in many instances the economic and education models are at odds. Although both seek to create well being, in practice, economics defines well being much more narrowly than does education and the economic definition often crowds out the more expansive and more difficult to measure definitions of educators. In such a scenario feminist economics helps ease economics imperialistic invasion of education policies. Education needs the insights of economics, but those insights need to be frequently challenged from other social sciences, from the humanities, including moral philosophy, and from feminist scholarship.
References
[1]: “The Application of Mainstream Economics Constructs to Education: A Feminist Analysis”: Myra H. Strober
FROM THE EDITORS’ DESK

Taxes on Alcohol & Cigarettes

Deeksha Trehan & Aditi Singh


History reveals that commodities which are considered sinful or unhealthy traditionally attract the heaviest duties. In this article, we shall look particularly at alcohol and cigarettes. We shall call those who consume them ‘the sinners’ and those who abstain from them ‘the saints’. The duties levied for the good of our physical and moral well-being we call ‘sin taxes’.
The government wishes to curb smoking and drinking because it thinks that society incurs a huge cost due to them. However, this is a myth. The studies which tell the cost that society incurs, known as cost of vice studies, often present grossly exaggerated figures. The temperance group Alcohol Concern, for example, insists that “the cost of alcohol to society is estimated at £17-22 billion, or even as high as £55 billion”. The anti-smoking group Action on Smoking and Health says that “the annual cost of smoking to the national economy is £13.74 billion”. As Sloan et al. note in their book The Price of Smoking, “Using the willingness-to-pay value of lost lives, some estimates of smoking-attributable cost have exceeded the gross domestic product of the U.S. manufacturing and health sectors, which is implausible”. These studies are dominated by ‘costs’ which are neither financial nor borne by the taxpayer like intangible costs of premature mortality and emotional distress, lost productivity due to absenteeism, sickness and death and expenditure on the product itself. All these costs are borne by the ‘sinner’ himself. The myth that smokers and drinkers are leeches on the taxpayer’s arteries persists because the government has no incentive to tell the public that these groups are being exploited and the affected industries dare not advertise the savings that come from lives being cut short by excessive use of their products.
The case of alcohol differs from that of tobacco and ‘unhealthy’ food in so far as there are additional externalities relating to violence, drink-driving and property damage, but these are covered by existing alcohol taxes with several billion pounds to spare. Even if we use the broadest estimates offered to us in British cost-of-vice studies, the publicly borne costs of drinking amount to less than £7 billion a year. Notwithstanding the fact that these figures exclude the benefits of alcohol, this is less than the £9 billion received by the state each year in alcohol taxes.
The intention behind sin taxes is not always genuine. It is seen that governments increase taxes on cigarettes and alcohol when they are in need of quick cash. The USA fought both the World Wars, the Civil War and the War of 1812 on the back of alcohol taxes. In Germany, taxes on cigarettes rose dramatically during the Second World War, until they made up 80 to 95 per cent of the price of a pack. More recently, faced with his own budget deficit in 2009, Barack Obama raised the federal cigarette tax by 156 per cent, despite having promised a year earlier that “no family making less than $250,000 a year will see any form of tax increase”. Even during election times, when it comes to balancing budgets, voters prefer raising tobacco taxes to other tax increases or cutting crucial programs such as education and public safety. They are easier to collect than income taxes and less visible than direct taxes. Moreover, tax increases on ‘sinful’ items are considered to be ‘righteous’. These taxes are also motivated by base financial considerations. Various US states and several EU countries have purposefully lowered alcohol and tobacco duties so as to attract foreign companies.
It is often argued that people who consume alcohol and cigarette put pressure on the existing resources, involve in crimes and cost the government too much by deteriorating community health. But smokers and alcoholics die early. ‘Saints’, on the other hand, require greater expenditure in pensions, nursing care and welfare payments. Lippiatt (1990) found that every 1 per cent decline in US cigarette sales increased life expectancy by 1.45 million years. But these 1.45 million years added $405 million to the nation’s medical costs, whereas a 1 per cent increase in cigarette sales saved $480 million. In truth, the choice is not between vice-related disease and infinite health, but between “relatively cheap lethal diseases or rather expensive chronic ones”, as van Baal etal. (2008) put it.
The demand of cigarettes and alcohol is highly inelastic. The price elasticity of cigarettes, for example, is generally held to be between -0.3 to -0.5. The consumption price elasticity of alcohol is at around -0.44. Anti-smoking advocates are, however, less interested in the consumption elasticity (how many units are sold) than in the participation elasticity (how many smokers quit altogether). Price rises are less effective in reducing smoking prevalence than in reducing the number of cigarettes smoked. The participation elasticity for cigarettes is around half of the consumption elasticity at -0.1 to -0.3, meaning that a 10 percent price rise should make 1-3 per cent of smokers quit. If the government increases the prices by levying taxes on them, the fall in demand will be very small. Thus, increasing taxes is far more likely to impoverish consumers than it is to turn them into abstainers. Such levies are better seen as stealth taxes than sin taxes.
These taxes are also doubly regressive because they hit the poor harder. Sin taxes are not normally value added in nature meaning that expensive, high-quality products purchased by the wealthy comprise of a much smaller proportion of their incomes in the real sense, but are a major proportion of the incomes of the poor. So, the poor end up paying a greater proportion of taxes. Hence, sin taxes lead to rising income inequalities. A study by RTI International shows that cigarette taxes are financially hurting low-income smokers rather than making them more likely to quit. The survey, which looked at more than 13,000 people living in New York state, found that lower-income smokers in the state spent nearly a quarter of their household income on cigarettes compared with an average 2 percent spent by wealthier New York smokers.
If taxes are increased too much, it will be more likely that people will involve in smuggling cigarettes and alcohol illegally and avoid paying the tax, which will in turn, reduce the revenue and deteriorate health at the same time. Moreover, sin taxes fail to affect consumers' behaviors in the way that tax proponents suggest, for instance increasing smokers' propensity to smoke high-tar, high-nicotine cigarettes when the per-pack price is raised and increasing the rate of people mixing their own drinks rather than buying pre-mix alcoholic spirits.

Additionally, it can be proved that sin taxes are not efficient. To take a scenario roughly analogous to Britain in 2012, let us say that there are ten million smokers paying £7.00 per pack. These ten million people represent 21 per cent of the population. A typical estimate of participation elasticity is -0.23, which means that a 10 per cent price hike should reduce smoking prevalence by 2.3 per cent. Persuaded by anti-smoking campaigners that raising prices is the most effective way of cutting the smoking rate, the government duly enacts a 70p (10 per cent) tax increase. Following the elasticity model, 2.3 per cent of smokers find that they can either no longer afford their habit or no longer find that the benefits outweigh the cost. They quit, thereby reducing the smoking population from 10,000,000 to 9,770,000. 230,000 people have become ex-smokers, but at a great cost to the remaining 9,770,000. Since the average smoker consumes thirteen cigarettes a day, the 70p tax hike will cost them an extra £1.6 billion per year, in addition to existing tobacco taxes. The cost of getting each of the 230,000 smokers to quit is therefore £7,055 each—and this is not a one-off payment, it must be paid every year indefinitely. At an annual cost of £1.6 billion, the smoking rate has dropped from 21 per cent to 20.5 per cent. At best, this would eliminate 2.3 per cent of the cost of smoking, but even if we take the most grossly inflated estimate of what that cost might be, it would be a saving of less than £1 billion. The intervention, therefore, would be loss-making. It is surely plausible that there are more efficient ways of helping people to stop smoking than by transferring large sums of money from the target group to the government. Furthermore, the government has no moral claim to this money on remunerative grounds and the tax fails to modify the behavior of 97.7 per cent of the target group.

Sin taxes, however, have been found to reduce smoking prevalence among the youth. Since young drinkers are more price-sensitive, tobacco tax increases are one of the most effective ways to reduce smoking and other tobacco use. However, the harms from levying sin taxes greatly outweigh the benefits. So, we need to look for alternative methods. One could be the introduction of awareness programs on smoking and drinking, especially in schools and colleges. Furthermore, we can argue that sin taxes will benefit society only if the revenues are used in the direction of alleviating health distress through increased enforcement, health promotion and community action, research and treatment, and not as other taxes are used. Dr K Srinath Reddy from the Public Health Foundation of India said in reference to the introduction of a designated sin tax during the 12th five year plan in India, "It can only work if the sin tax collected does not go into the general revenue pool. It's a good idea and will lead to reduced consumption, especially among people with low disposable income, due to increased prices. The first budget of the National Rural Health Mission actually came from taxes from tobacco." Another, as suggested by Dr. John Spangler of Wake Forest Baptist Medical Center, is that the tax money could be used to distribute low-cost or free smoking cessation medication, or to ramp up tobacco-prevention programs.

A more efficient way would be basing the alcohol excise system on the actual alcohol content in beverages (volumetric tax). If the excise rate is increased for alcohol products generally, then, it should be reduced for low-alcohol products. This would encourage increased marketing of low-alcohol products, which could help in reducing alcohol-related harm.

To conclude, we would just like to say that from an economic point of view, sin taxes are self-defeating in nature. They are only helpful in small amounts of taxes so that the consumption is reduced by small amounts, because if the policy works too well, it will be a problem for the government because it shall lose its revenue source. So the government might like to improve public health, but at the same time, it would not like to improve it too much because of the fear of reducing the revenue earned and the concern for balancing budgets.

References:


  1. Chaloupka F, Grossman M, Saffer H. 2002. The effects of price on alcohol consumption and alcohol-related problems. Alcohol Research and Health Vol.26, No. 1, 22-34.
  2. Australian Broadcasting Corporation, Cigarette Tax Burdens Low-Income, Doesn’t Deter Smoking


  3. Business Insider, Why Smokers Shouldn't Be Scared Of The WHO's Global Recommendations For Cigarette Taxes.

  4. The Times of India, Govt. plans to introduce ‘sin tax’ to curb use of alcohol, tobacco.

  5. Christopher Snowdon, Adam Smith Institute, The Wages of Sin Taxes

  6. The New York Times Upfront, Do Sin Taxes Work?

  7. Sloan et al. The Price of Smoking

  8. Lippiatt, B. C., ‘Measuring medical cost and life expectancy impacts of changes in cigarette sales’, Preventive Medicine, 19 (5), Sept. 1990; pp. 515-32

  9. Van Baal, P. et al ., ‘Lifetime Medical Costs of Obesity: Prevention No Cure for Increasing Health Expenditure’, PloS Medicine, 5 (2), Feb. 2008; p. 243

Taxes on Fuel & Plastic Bags

Stuti Oberoi & Amrita Garai


A fuel tax (a petrol, gasoline or gas tax or a fuel duty) is a form of excise tax imposed on the sale of fuels which are intended for transportation, in most countries. Fuel tax rates vary from one country to another due to varying policies. In this segment, we will analyze the consumer behavior associated with it.

Reasons for imposing Fuel taxes

Environment Protection

Due to the increasing problems of climate change and global warming, policy makers around the world have realised that something needs to be done. Fuel consumption is increasing rapidly (at the rate of approximately 4% in India); a major cause being vehicles. They are a leading source of air pollution, generating 13% of global emissions of greenhouse gases. Thus, a reduction in fuel use is needed. This can be ensured by a rise in fuel prices via taxation. Higher taxes can spur cuts in driving, fuel-efficient vehicles, and consequently a reduction in polluting emissions, congestion, and traffic accidents. Although environmental taxes are often considered politically infeasible, Western Europe has experimented with fuel taxes and they did have a significant environmental impact. Fuel prices, and the external environmental costs of energy consumption are predicted to increase significantly in the future due to growing demand and rising production costs, so higher fuel taxes in the present are justified to increase transport system efficiency so that future economy is less burdened by excessive fuel costs. The important question to ask is the extent to which households will alter their behavior when they face higher fuel prices?’



Revenue Generation

The governments of many countries impose fuel taxes as a source of revenue generation. This revenue is diverted towards filling up the fiscal deficits due to the fuel subsidies provided to some sections of society. They help finance transportation programs. Some economists even suggest increasing fuel taxes as part of a revenue-neutral tax shift, which means increasing taxes on resources such as fuel to fund reductions in more economically harmful taxes, such as those on income and investments.



Behavioral impact on consumers and distributive effects of fuel taxes
Fuel taxes have sometimes been criticized on distributional grounds due to a perception that fuel taxes are regressive as they impose a larger burden on poor people. Some studies contradict this argument saying that fuel taxes are in fact progressive. These studies have shown to be varying according to the developmental and income status of countries. We are going to analyze the distributional effects of fuel tax in both developed and developing nations with the help of specific case studies.

Developed Nations

In countries with very high incomes such as US and UK, even poor households have cars- in fact it is the poor who own old, energy inefficient cars. So a common argument against raising fuel taxes is that it would be regressive—poor households would bear an unfair burden. This section examines the effect of the road fuel tax on sub-groups of the population of UK, as presented by Zoey Smith. The effect of a 6% real increase in duties on the cost of achieving a level of economic welfare is analyzed. Households are ranked according to income and divided into 10 equal groups, so the first decile contains the poorest 10%. The effect of the tax increase on the cost of living of the poorest households is smaller than the effect on richer, with the greatest effect being on middle-income households. Repeated increases in fuel duty would have a much larger effect. The distribution of the effects is largely caused by many households in the lowest income groups.

Developing Nations


As seen in the figure, the combined budget share of all fuel products is higher for higher consumption deciles. This indicates that an overall fuel tax would be strongly progressive. In India, kerosene is the popular lighting and cooking fuel in rural areas. But as consumption and income increase, people move towards electricity and gas. So taxes on kerosene are regressive for low-income countries.

When just direct consumption is considered, taxes on transport fuels (petrol and diesel) are highly progressive for both urban and rural sector as they affect the higher income group because poor people don’t own cars.



Policy Implications

Unlike a tax imposed for revenue purposes, an environmental tax should be imposed on fuels with elastic demand and on fuels with emission potential. transport fuels demand responds to price changes in the long run. Thus a tax on transport fuels leads to emission reduction without adverse distributional effects.

The effect of the price hike through direct spending on gasoline would be progressive as households in the highest socioeconomic strata would be most affected. By contrast, the effect of the price hike through spending on diesel—both direct spending and spending via bus transportation—would be regressive. Policymakers differentiate taxes on diesel and gasoline. An alternative is to use revenue from fuel tax hikes to subsidize bus travel.

In the final analysis, in deciding whether to raise fuel taxes, policymakers need to balance an array of distributional, political, fiscal, and environmental goals.



PLASTIC BAG TAX
Plastic Bag tax is an environmental levy on plastic bags which aims to rationalize their consumption and production. Mostly it is imposed on plastic bags provided by retailers at point-of-sale or from other outlets. The experience of the plastic bags levy (or PlasTax), in the Republic of Ireland, where the usage reduced by 90%, has encouraged other countries to impose a similar levy. In this segment, we will analyze the policies relating to their plastic bag taxation and the consumer behavior associated with it.
Rationale behind taxing plastic bags

Plastic pollution is the nexus of some of the major environmental challenges facing us today. It is a visible and persistent component of litter pollution, polluting waterways, other natural areas and killing of animals. But the greatest damage is economic—the cost of cleaning up all the bags and the damages caused by them. The major environmental benefits of a levy on plastic bags are reduced littering, reduced use of resources and energy, lower pollutant emissions and increased public awareness of environmental issues. Moreover, rationalizing the consumption of plastic bags will redirect funds to infrastructure and spur entrepreneurial efforts to come up with alternatives to plastic. Therefore, plastic bag tax is used as a policy instrument explicitly aimed at changing consumer’s behavior. It is expected that consumers would reduce their usage of plastic bags but the question remains whether it would decrease sufficiently enough to bring about a substantial positive impact.


Case Study of Scotland

Studies and experience suggest that that if only plastic bags are levied, then there would be some shift in plastic bag usage to paper bags which have worse environmental impacts.

A study conducted by the Scottish government quantified the effects under the two levy scenarios:


  • Scenario 1: A levy on plastic but not paper bags.

  • Scenario 2: A levy on plastic and paper bags


Nature of taxation:

The tax was fixed at an amount sufficiently high to encourage consumers to bring their own ‘permanent’ reusable shopping bags with them. The study estimated that due to the plastic bags the annual cost to Scottish consumers would be $6.50, which is reasonable and would not act as a burden for the poor.



  1. A levy of 10p on plastic bags only
    Result: Slightly effective


  • In the case of a tax on all plastic bags (including biodegradable ones) plastic bag usage fell by 77%. There was a decrease in annual plastic bag consumption from 6,200 to 620 metric tons.

  • But the total tonnage of all carrier bags used and requiring disposal actually increased by 5,409 tonnes (0.26% increase) since consumers substituted plastic bags with paper bags.

  • Atmospheric acidification and the risk of litter was considerably less than the pre-tax scenario.




  1. A levy of 10p on plastic and paper bags.
    Result: Fully effective


  • The number of bags entering the consumption stream reduced by approximately 94%

  • Including paper bags under the levy spectrum yielded reduction in the tonnage of waste by 4,993 tonnes per year (0.24% decrease).

  • Thus, the environmental benefits increased. There were reduced impacts in terms of consumption of water, and emissions of greenhouse gases because paper bags have a higher environmental impact in these categories relative to plastic bags.

Conclusion

Consumption of plastic bags decreased substantially. The study concluded that the environmental benefits were modest when only plastic bags were levied (Scenario 1) compared to environmental impacts when both plastic bags and paper bags were taxed (Scenario 2).


THE INDIAN SCENARIO

The Indian plastic industry is growing at a rate of about 17%, with the total consumption of plastics being about four million tons per annum. Hence, an outright ban would be politically costly because there is already a thriving industry that employs a considerable number of people.


Although policy instruments like consumer awareness and anti-littering campaign have been initiated, the desired fall in wasteful consumption has not been achieved. In general, the policy instruments had an inherent limitation as they primarily sought to achieve this by promoting reuse and recycling.
It is essential to impose a tax on plastic bags to combat indiscriminate use which is the root cause of littering. Including paper bags in the ambit of the tax would accentuate the environmental benefit.

Without regulation, the cost of plastic bags is often hidden in food prices. Hence, even if consumers do not get a bag, they are still made to pay for it. With more transparent taxation, food prices would be lower. It would also ensure that the economic costs of environmental damage are internalized by those responsible for causing the damage through the market mechanism (polluter-pays principle).

Introduction of a price signal through the use of a plastic bag tax can influence consumer behavior significantly but stakeholder and consumer acceptance needs to be ensured. Informational campaigns highlighting the environmental impacts and hypothecation of revenues into an environment fund are central in ensuring such acceptance.
Carbon Taxes



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