The Law of Diminishing Return

The article “The Diminishing Returns to Tobacco Legislation” by Pierre Lemieux ( The Laissez Faire City Times , March 19, 2001) discusses the law of diminishing returns in relation to the consumption of tobacco products by government intervention in the cigarette industry.

The article makes some interesting and valid observations. Government intervention is required to reduce consumption of tobacco products. From 1985 to 1995, the consumption of cigarettes is reduced by 18 percent by raising taxes to 52 percent. From 1995 to 1999, prices jumped by 48 percent but consumption was reduced by 11 percent. The taxation on the tobacco industry has reduced the use of cigarettes. The government also decided to use a different strategy to reduce consumption. The Canadian federal government passed regulation to put large panic pictures of diseased lungs, hearts, gums etc. on cigarette boxes. By making people aware of the health risks associated with smoking, the government tried to persuade those smokers who were not persuaded by the tax increases.

Lemieux also points out that government intervention becomes less effective and resistance will develop. People who can be easily persuaded have already quit with initial intervention. It will take a lot more effort to persuade the remaining consumers and some may not be persuaded at all. The author also states that too much information may also kill information. With information saturation, people will start to ignore the warning messages. Consumers are aware of the health risks of smoking from independent sources which are highlighted by the images on cigarette packs.

The law of diminishing returns does not seem to have been reached.  The tax increase of 5.2 percent per year has reduced consumption by 1.8 percent per year over 10 years.  The tax increase of 4.8 percent per year has reduced consumption by 2.75 percent over a period of four years. As the law of diminishing returns has not yet been reached yet, the government has decided to use panic pictures on the cigarette packs.

Governments discovered a long time ago that tobacco products have inelastic demand. Although raising taxes, called Sin Taxes, will increase tax revenue due to inelastic demand, people will still buy nearly the same amount of cigarettes. Governments will neither make tobacco illegal nor create a public utility as proposed by David Kessler, former head of the U.S, Food and Drug Administration (Lemieux). By making tobacco sales illegal, governments will lose the tax revenue from tobacco sales and will face the task of controlling a black market of tobacco products.

Source: 

Lemieux, Pierre. “The Diminishing Returns to Tobacco Legislation.”  

Retrieved on Oct 10, 2012 from

http://www.pierrelemieux.org/artdiminish.html