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Economics commentary – China set to introduce new rules on smoking in public Essay

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China’s economy is known as one of the strongest economies in the world, as they achieved a very high recorded rate of growth domestic product in 2010 with 10.3%, as well as china is one of the main exporters worldwide, all of these are reasons why China has a powerful role in the world economy. But unfortunately this power could be in dangerous if the economy faces market failure. Market failure occurs when there is a misallocation of resources according to the price mechanism towards the social optimal way caused by the failure of the market signal function to identify the efficient and exact outcomes (Mankiw, 2011).

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Which consequence externalities, In our market failure case, there is something called negative externality, which means that the third party, who are neither the consumer nor the producer, they are the society, known as the marginal social (MSb/c). This good produced is harmfully or damagingly affecting the society. Therefore there is misallocation of resources. Traditionally Government intervenes by adding to the basic price, taxes to lower the demand on the good which influences the social and private cost positively by lowering their quantities as shown in {figure A}.

Concerning the article, the negative externality is present in china due to cigarettes supported by the fact that 1 out of 3 people is smoking, which is considered a negative pick rate, which surely affects the environment and the third party, as mentioned above. This fact, and the increase of cigarettes consumption, makes “The country’s authorities believe smoking kills more than one million people every year and that figure is predicted to triple by 2030”. This statement is a very dangerous signal for china, mentioning that Chinese future is unsafe concerning both socially and economically as well, because “Smoking is a very old Chinese tradition” ,

which actually affects negatively the economical issues. Cigarettes are considered as demerit good. The Government has different ways to intervene and to either stop selling this kind of product or to lower its impact on the society.

They can either put legislations by law to limit the quantity produced by the supplier for example for this particular good, or by banning, ban the production or consumption of a certain good that causes a negative externality, or may be by advertising to influence producers and consumers and warn. or finally by taxation, the act to put a high tax on demerit goods, which is the very known and traditional way of lowering the consumption of a good having negative externalities (Mankiw, 2011), Also the tradable permits, which could be a solution in other situations, but it may have a relation to the Chinese one, as we know the production of cigarettes is surely harming the environment so that they can use the tradable permits to minimize the supply of cigarettes. All of these are ways for the government to attempt to correct market failure by influencing both supply and demand for goods.

This is exactly the situation in China, cigarettes has a negative impact generally and increasing day after day its negative effects on the society, thus the government decided to make new strict rules to lower this impact as mentioned in the article, so this directly mean that the Chinese government has decided to weather apply legislation or ban more powerfully beside their stable taxation and their advertising influence.

But in the situation of china they have many limitations and variable parameters that will surely affect their decisions as that The tobacco companies have huge influence in the whole Chinese industry, which means that banning couldn’t be the correct way to solve their problem as The government operates a monopoly on tobacco sales, which brings in huge amounts of source to the government as tax receipts, also at legislation may be at the same situation of banning because some Campaigners say it is difficult to promote anti-smoking policies for the reason that china is one of the biggest suppliers and producers of cigarettes as the foreign countries franchise in china for the low labor income, (Arnold, 2007) so that puts china in a bad situation as lack of transparency which may lead to internal political problems…for example, if they legalize and allow franchisor to come, they may lose the confidence of people.

For the reason that foreign companies come to china to produce their cigarettes because “The cost of a packet of cigarettes is significantly lower in China than in many western countries”. The solution which may help the Chinese government to interfere and either to correct the market failure economically if happens or socially to help the society to maintain good health and social wellbeing (Arnold, 2007), is actually the taxation by increasing very high percentage of tax {figure B}, after putting in consideration all of the limitations, the use of taxation is the ideal solution.

To conclude, we can say that the government has to keep the market under surveillance because the market is left totally free, surely will appear overproduction of goods having negative externalities as demerit goods, as cigarettes or goods that passes from steps in production that pollute the environment, causing circumstances as spreading different diseases and danger for all living organisms which leads socially to high death rate and economically on the long term to economical crisis. Therefore, government has to interfere, to limit the extent of demerit goods on the free market, to insure a safe future both economically and socially.


Arnold, R. A. (2007). Microeconomics. switzerland: thomas south-western.

Mankiw, N. G. (2011). Principles of Economics Study Guide. New City : Cengage Learning.

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