1.

0 INTRODUCTION

In the presences of externalities, the price of a good need not reflect its social value. In the end,

firms may produce too much, or too little output and the market outcomes will lead to

inefficiency. In the other words, externality portrays one of the market failures which is the

outcome of an economic transaction is not completely efficient, meaning that market failure

occurs when the price mechanism fails to account for all the costs and the benefits necessary

to provide and consume a good. (Encyclopedia Britannica, 2010)

Externality refers to situation when the effect of the production or consumption of the

goods and services can be a cost or benefit received by a third party. (Investopedia, 2019)

However, the third party has no control over the creation of that cost or benefit and it also

depicts that the third party has not directly related to the production or consumption of that

goods or services. The normal operations of the market system will not consider the cost

incurred due to externalities. When a product or service’s price equilibrium cannot reflect the

true cost and benefits of that product or service, the externalities will exist.

In the presence of externalities, the social costs include a valuation for the impacts of

externalities in addition to private costs. Broadly, private costs include the opportunity cost of

undertaking an economic activity. Both social and private costs emerge social and private

benefits that together design social welfare maximization. From the perspective of non‐market

interdependence, which exist when the different production functions and preference functions

are interdependent and the activities of one group have either a beneficial or harmful impact on

similar activities of another group, the associated attributes of external economies or external

diseconomies is identified as the principal causal factor contributing to the divergence between

social costs, private costs, and social and private benefits emerge. (Lin, 1976)

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 In economics, the externalities can be divided into two scope either positive or negative

ways. Positive externality occurs when the market interaction of the others presents a benefit

to non-market participants. Externalities can occur between producers, from producer and

consumer, from customers to producers or between consumers. Both positive and negative

externalities do not have much differences.

For some reasons, environmental damage is one of impacts from economic production

due to negative externalities. This situation arises in all countries whether they generate high

income or low income. Unfortunately, this kind of damage required the country to bear the

cost. this problem absolutely needs government intervention in order to minimize the negative

impact that are indirectly affect the country. However, the government needs to set a strict

regulation regarding to the environment. (Centemeri, 2009)

In contrast to negative externality that impose costs to the innocent bystander, positive

externality on the other hand, generates benefits to the bystander. As the results, it will create

inefficiency to the production. Hence, the externality can provide both positive and negative

effect to the bystanders.

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2.0 TYPE OF NEGATIVE EXTERNALITIES

2.1 Negative Production Externalities

Negative production externalities are the aftermath of production activities. In an unregulated

market, producers are not accountable for external costs that exist and the effects are passed to

the society. There are many pollutions caused by the production activities such as water

pollution and air pollution. Enormous enterprises and manufacturing plants utilize huge

amounts of water from close by lakes, rivers, and seas to operate. During the manufacturing

procedure, the water is exposed to synthetic compounds, substantial metals, natural sludge, and

radioactive waste. That water is then dumped once again into its original water source. In

addition to the fact that this process has affected the plants, animals, and insects in their living

space, and farmers also utilize that water for water system, making destructive impacts to the

food we eat. Next, the air pollution has been the culprit for various illnesses, progressively

repeated over time. The impacts of air contamination affect everybody, every day. It is brought

about by the smoke discharged by different enterprises. Therefore, marginal social cost exceeds

marginal private cost (MSC > MPC).

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Figure 1: Negative Production Externalities

Marginal social cost (MSC) represent the total cost society pays for the creation of another unit

or for making further move in the economy while Marginal private cost (MPC) is the firm’s

private costs of production. The negative externality is the vertical line difference between

MPC and MSC. Q* is optimal production quantity while Q1 is the negative externality result.

The blue triangle shows the deadweight loss.

2.2 Negative Consumption Externalities

Negative consumption externalities take place because of consumption of goods and services.

It happens when an individual’s consumption causes harmful effects to others who are not

compensated by the individual. For example, by smoking in open places, the consumer is

making negative externalities by creating passive smoking for non-smokers that can cause non-

smoker risk of getting lung cancer and other serious illnesses. Also, if one plays a very loud

music at midnight, it can cause disturbance to the other neighbours and reduce the neighbour’s

satisfaction of living in the house. Next, littering. It has become a habit that people throw their

food wrappers everywhere because they are too lazy to put it in the rightful place and they

believe that there are no consequences of their actions. Little do they know; it affects the

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environment because the wrappers can be blown into the drain that can pollute the waterways

and it costs millions of ringgits to clean up the littering. Thus, marginal social benefit of

consumption is lower than the marginal private benefit (MSB < MPB).

Figure 2: Negative Consumption Externalities

In negative externalities, the MPB isn't reflecting social benefit and in this manner MSB lies

underneath MPB. The vertical contrast among MPB and MSB is the negative externality. The

optimal level is MSB=MSC, which is Q*. The negative externality is being overlooked and, in

this way, there is an over utilization of goods at Q1.

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3.0 INTRODUCTION OF CIGARATTES

Cigarettes are a demerit good which is a good that is over provided by the market and

consumption of this good is harmful to society. Cigarettes are harmful to society because

they produce a negative externality. This is because the consumption of cigarettes has a

spillover effect on third parties and no compensation is paid by anyone. For cigarettes, the

benefit of consuming has a greater effect on the consumer than on society. So, the marginal

benefit for the consumer is greater than it is on society. This results in an allocative inefficiency

is achieved by the industry producing the cigarettes. This negative externality produced by

cigarette consumption causes major health issues for the consumer and greater adverse

effects for society. Before the government ban on advertising was set in 1970, this externality

was much greater. Without the ban, the average price of cigarettes was lower which caused

an increase in cigarette consumption, an increase in consumer surplus and a decrease in

producer surplus. When the government was restriction was enacted, prices increased

resulting in a negative change in total surplus. This meant that government intervention was

successful in reducing the negative externality effect on society.

In year 2016, 12% less children have been admitted to a hospital after the first year

since the ban on smoking in public places was implemented. This proves how smoking is a

major externality in the world. An externality is when the production or consumption on a

product affects someone else. Someone may be smoking in a public area or in their car and

they might not know, but it affects everyone around them. Others can and will breathe in the

smoke from them smoking. Smoking has a major negative externality because it not only

pollutes the world, it causes other people to have the long-term effects as well. This is an

externality because the people who are purchasing the cigarettes and the tobacco are not

aware about the economic debt that they are causing. This can all be prevented if smoking

was illegal and if people were aware of the negative externalities that smoking causes.

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 Another externality is how everyone’s taxes goes to taking care of all of the smokers

and their health care. It is not fair to the people who do not smoke to pay for the people who decide

to make that decision to get all those health problems by smoking. People who work hard for

their money should not have to provide for the people who decide to make the bad decision to

smoke and ruin their health. It is precisely to reduce or eliminate negative externalities that

many laws and regulations exist. The government has tried to implement laws regulations

regarding smoking. For example, in most public places like restaurants, smoking is not allowed.

However, people can still smoke and it is affecting everyone around them and it is causing a

major negative externality.

4.0 NEGATIVE EXTERNALITY: ISSUE OF CONSUMPTION OF CIGARETTES

Figure 3: Negative Externality of Smoking Cigarettes

From Figure 1 it shows that the Marginal Social Benefits (MSB) curve is smaller than the

Marginal Private Benefits (MPB) curve, thus the negative externalities affect the private utility

significantly by diminishing it. Addiction to the cigarettes will force consumers buy cigarettes

at the equilibrium level MPB=MSC as the demand for cigarettes is non-elastic. The consumers

are will not think about the negative effects that the consumption will have on third parties,
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 they will only think about the benefits/costs to them. In the case of smoking, the smokers will

not think about the effect of passive smoking on children which can cause asthma, but of the

benefits to themselves. This means consumers will maximise their utility and consume at the

quantity of Q2, where the marginal social costs equal the marginal private benefits, rather than

the socially desirable level of Q1, where the marginal social benefits equal the marginal social

costs. This results in a welfare loss (deadweight loss) to society, as shown by the blue, shaded

area. The welfare loss (deadweight loss) to society as a result of smokers smoking as much as

they please without paying for the costs they inflict on the rest of us.

Figure 4: Value of Tax Equal to the Negative Externality

Figure 2 shows the effects of negative externality when the government impose tax in cigarettes

market. The origin equilibrium point at quantity of cigarettes Q2 and prices of cigarettes P2.

When the tax was imposed by the government, the supply curve shifts upward to the increased

level of supply + tax. Assume that Marginal Social Costs (MSC) = supply, the most desirable

situation would imply value of the tax equal to the negative externality. With consecutive

actions of government intervention proportional relation may be achieved. This led to the

lowered demand and the consumption of cigarettes may decrease effectively to the Q1. It is

worthy of mentioning that it returned to the initial equilibrium – but at a higher price (P3).

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Government will be also being able to increase the budget revenues. This situation, on the other

hand, may lead to the enlargement of the black market and crime. Prices of cigarettes will

increase; therefore, regular smokers will have spent more money to fulfil their desire of

smoking. Those who have lower income or less available funds for remain on living, thus their

living standards have to decrease. In a long-run, it may be harmful to the productivity of people.

It is because cigarettes are an inelastic-demand product and the smokers tend to smoke at any

costs is it plausible that the decrease of the number of smokers may be unsatisfactory from the

government perspective.

5.0 THE RELATIONSHIP BETWEEN CIGARETTE PRICES, CONSUMPTION AND

INCOME IN TURKEY

Turkey is one of the largest tobacco consumers. Among OECD countries, Greece and Turkey

carry the second-highest smoking rates, with more than 27 percent of persons over fifteen years

of age declaring themselves to be daily smokers (Tobacco Taxation in Turkey – An Overview

of Policy Measures and Results, 2017).

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Figure 5: Cigarette Prices, Consumption and Income in Turkey (1995-2008)

Based on figure 3 shows the relationship between cigarette prices, consumption and income in

Turkey from 1995 to 2008. As we can see on the graph, even though there is increment in the

cigarette prices but the consumption still remains the same. This is due to increment of cigarette

prices parallel with the increment of income such as in year 1995 to 1997. In 1999 to 2000 the

prices of cigarettes are slightly decrease while the income has a high decrement. This change

only gives small effect on the consumption of cigarettes. This due to the inelasticity demand of

cigarettes. Based on the graph starting from 2004 there was reduction of cigarettes consumption

due to the tax implement by Turkey’s government. Turkey’s government increased tobacco tax

revenue and lowered tobacco consumption by increasing tobacco tax rates significantly

between 2003 and 2013. (Tobacco Taxation in Turkey – An Overview of Policy Measures and

Results, 2017)

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6.0 IMPACT OF NEGATIVE EXTERNALITIES
Negative externalities usually come at the cost of individuals, while positive externalities

generally have a benefit. Our focus is on cigarettes which lead to death, illness and

impoverishment. This has a negative impact on people who may live in the area, causing them

harm. Pollution is another commonly known negative externality. Corporations and industries

may try to curb their costs by putting in production measures that may have a detrimental effect

on the environment. While this may decrease the cost of production and increase revenues, it

also has a cost to the environment as well as society.

When negative externalities are present, it means the producer does not bear all costs,

which results in excess production. With positive externalities, the buyer does not get all the

benefits of the good, resulting in decreased production. Let's look at a negative externality

example of a factory that produces widgets. Remember, it pollutes the environment during the

production process. The cost of the pollution is not borne by the factory, but instead shared by

society. (Corporate Finance Institute, n.d.)

Smokers impose tremendous costs on themselves. Based solely on the degree to which

smoking shortens their life expectancy, which is by about six years, the cost per pack is $35.64.

That cost, of course, is a private cost. In addition to that private cost, smokers impose costs on

others. Those external costs come in three ways. First, they increase health-care costs and thus

increase health insurance premiums. Second, smoking causes fires that destroy more than $300

million worth of property each year. Third, more than 2,000 people die each year as a result of

“secondhand” smoke. A 1989 study by the RAND Corporation estimated these costs at $0.53

per pack. (Fall, 2011)

Cigarettes killed more than 8 million people a year around the world which is the one

of the biggest public health threats the world has ever faced. More than 7 million of those deaths

are resulted from the direct used of tobacco while around 1.2 million are the result from

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non-smokers being exposed to second-hand smoke. The burden of tobacco-related illness and

death is heaviest when around 80% of the 1.1 billion smokers worldwide live in low- and

middle-income countries. (World Health Organization, 2019)

The economic costs of tobacco use are large and include a significant health care costs

for treating diseases caused by tobacco use as well as human capital is lost resulting from the

morbidity and mortality caused by tobacco. In some countries, children from poor households

working in tobacco farming to increase their family income. These children are extremely

vulnerable to "green tobacco sickness", caused by nicotine is absorbed through the skin from

handling wet tobacco leaves. (World Health Organization, 2019)

Secondhand smoke is the smoke that fills restaurants, offices or other enclosed spaces

when people burn tobacco products such as cigarettes, bidis and water pipes. There are over

7,000 chemicals in tobacco smoke, of which at least 250 are known to be dangerous and at least

69 are known to cause cancer. There is no safe level of exposure to secondhand tobacco smoke.

In adults, secondhand smoke causes heart disease and serious respiratory, including coronary

heart disease and lung cancer. In infants, it increases the risk of sudden infant death syndrome.

In pregnant women, it causes complications in pregnancy and low birth weight. Almost half of

the children regularly breathe air polluted by tobacco smoke in public places. Secondhand

smoke causes more than 1.2 million premature deaths per year.

65,000 children die every year from diseases caused by secondhand smoke. Anyone should be

able to breathe tobacco smoke free air. Smoke-free laws protect the health of non-smokers, are

popular, do not harm business and encourage smokers to quit. More than 1.6 billion people, or

22% of the world population, are protected by the laws without comprehensive national smoke.

(World Health Organization, 2019)

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 The greatest externality challenge in the modern world is to control our emissions of

greenhouse gases. The emission of greenhouse gases (GHGs) is associated with a wide variety

of economic activities such as coal-based power generation, oil-burning motors, wood-burning

stoves, etc. The most common GHG is carbon dioxide. The gases, upon emission, circulate in

the earth’s atmosphere and, if their build-up is excessive, prevent sufficient radiant heat from

escaping. The result is a slow warming of the earth’s surface and air temperatures. It is

envisaged that such temperature increases will, in the long term, increase water temperatures,

possibly cause glacial melting, with the result that water levels worldwide will rise. In addition

to the higher water levels, which the Intergovernmental Panel on Climate Change (IPCC)

estimates will be between one foot and one meter by the end of the 21st century, oceans may

become more acidic, weather patterns may change and weather events may become more

variable and severe. The changes will be latitude-specific and vary by economy and continent,

and ultimately will impact the agricultural production abilities of certain economies.

While most scientific findings and predictions are subject to a degree of uncertainty,

there is little disagreement in the scientific community on the very long-term impact of

increasing GHGs in the atmosphere. There is some skepticism as to whether the generally

higher temperatures experienced in recent decades are completely attributable to anthropogenic

activity since the industrial revolution, or whether they also reflect a natural cycle in the earth’s

temperature. But scientists agree that a continuance of the recent rate of GHG emissions will

ultimately lead to serious climatic problems. And since GHG emissions are strongly correlated

with economic growth, the very high rate of economic growth in many large-population

economies such as China and India mean that GHGs could accumulate at a faster rate than

considered likely in the 1990s. This is an area where economic, atmospheric and environmental

models are used to make predictions. Scientists attempt to infer something about the

relationship between temperature and climate on the one hand and carbon dioxide

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 concentrations in the atmosphere on the other, using historical data. Data values are inferred

by examining ice cores and tree rings from eons past. Accordingly, there is a degree of

uncertainty regarding the precise impact of GHG concentrations on water levels, temperatures,

and extreme weather events. The consensus is that, in the presence of such uncertainty, a wise

strategy would involve controls on the further buildup of gases. (Curtus & Irvine, 2016)

7.0 SOLUTIONS OF NEGATIVE EXTERNALITIES: CIGARETTEE

7.1 GOVERNMENT

i. Raising the Taxation Rate of Cigarettes

Raising the price of cigarettes through taxation is one of the most effective ways of reducing

consumption of it among smokers. This approach possibly saves numerous millions of people

around the world, yet it is a very productive type of tax assessment. In case that the government

needs to raise income or revenue to fund its use and obligation, at that point, cigarettes duty is

better than tax collection on business or speculation or different types of utilization. Tobacco

produces hurt, while work, general utilization and investment produce well‐being.

ii. Banned the Cigarettes Advertisement

Another key component of cigarettes control legislation is to prohibit or significantly limit the

amount of advertising. A major advantage for policymakers is that it does not require

significant government spending, but can provide significant health benefits. Norway and

Finland were among the first countries to prohibit ads, and after the implementation of the law,

smoking rates declined significantly.

Nevertheless, the evidence shows that tobacco advertising bans often accomplish such

reduce in numbers of smokers when the bans were comprehensive. Modified bans and informal

codes of conduct appear to be unsuccessful, and it is clear to see why: if only some forms of

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 advertisement were prohibited, marketing budgets clearly migrate to other styles of promotion.

For examples using YouTube channels rather than television advertisement.

Indirect marketing is a deliberate strategy which cigarettes companies use to bypass

tobacco advertising prohibitions and must be tackled in order for the FCTC to be efficient. In

many countries, implicit tobacco advertising is popular that does not have stringent

prohibitions. Throughout Malaysia, for instance, since a prohibition on tobacco advertising was

enforced throughout 1993, indirect marketing has grown rapidly. Since 1993, a moratorium

was placed on cigarette advertising.

iii. Smoke Free Public Place

Taking into account increasing evidence on the health effects of passive smoking authorities

must take measures to prohibit or severely restrict smoking in public places. It also serves to

de-normalize cigarettes by making it the case rather than the law. When smoking is permitted,

it should be restricted to places clearly identified, physically separated from non-smoking. It

also serves to de-normalize cigarettes by making it the case rather than the law. Smoke-free

measures have developed in some nations without regulation. Of example, in the United

Kingdom, in response to public pressure, most public places like supermarkets, cinemas, etc.

have implemented smoke-free policies. For many years, public support for such measures has

increased with more than 80% of the population expressing approval for cigarette prohibitions.

iv. Public Education and Awareness Campaign

Public education can be aimed to specific groups (e.g. adolescents, young adults, pregnant

women, or the general population) about the health effects of smoking. The main goals are to

educate people about the effect of smoking cigarettes, to motivate smokers to quit, and to

establish non-smoking as the practice. Public education may work at various levels: federal,

government-led programs can be customized to function at regional, community level, for

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 instance. It may be important to replicate awareness programs regularly until substantial

behavioral improvements are detected. The effectiveness of mass media initiatives can be

improved by having dedicated mobile help lines that can motivate smokers to receive more

guidance on quitting.

v. Prohibiting Sales to Children

As most smokers take up their addiction in infancy, initiatives to prevent cigarette sales to

minors may protect children and reduce the number of adult smokers as well. There are issues

with marketing bans to juveniles, though. The prohibition is often difficult to enforce because

it may not be regarded as a priority by police or other authorities. Securing a verdict may also

be challenging when children are not seen purchasing cigarettes. In fact, children can interpret

the consumption of smoking as an enticing opportunity by portraying tobacco as an' adult'

commodity. Nonetheless, the fact that tobacco companies advocate the ban of children's

advertising as part of their so-called "youth smoking reduction" campaigns indicates that the

steps are perhaps unsuccessful. To order for prohibitions to be successful, penalties must be

high and regional authorities or regulatory agencies must enforce the rule. Nonetheless, even

if not applied successfully, regulations on underage purchases at least demonstrate the desire

of government to preserve children's health.

7.2 PRIVATE SECTOR

i. Implement A Smoke-Free Workplace Policy

Prohibits smoking culture in working environment, but companies may expand smoking bans

to the companies surrounding areas to protect employees from the dangerous consequences of

second-hand smoke and encourage the smokers to quit.

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 ii. Establish A Clear Policies

A company should have a clear policy by offering guidance, meditation, and supplying

literature or data on how to avoid smoking, there are many opportunities to encourage smokers

to try to quit. The money spent to help those initiatives is much less than the effects of loss of

productivity and health care associated with smoking employees.

iii. Cessation Initiatives

Companies should offer financial incentives and benefits either in cash or in kind for those who

successfully quit smoking. Besides the Company can also promote other healthy lifestyle a

activities such as having outdoor activities and team building in order to keep their employees’

health in good condition.

iv. Provide Healthcare Benefits

Collaborating with doctors and other medical services can intensify the impact of cessation

initiatives. While making new work environment programs, especially with respect to

wellbeing and health, can regularly be an overwhelming assignment, numerous representatives

value the help. Around 70% of smokers state they need to stop, yet just five percent quit in a

given year. By supporting powerful smoke free work environment activities, Companies help

their employees to quit effectively. While demonstrated, the money related advantages of

helping employees to quit smoking complement the human advantage of helping an individual

settle on a decision that eternity improves personal satisfaction. Companies regularly create

solid relationship and bonds with their workers. Seeing their employees living a healthy

lifestyle. There is no restriction on smoking to follow a smoke-free rule. It does not mean the

employees with smoking habit were rejected. Referring addicts who try to quit the support they

need can make the rule harder to push back. It's also the best way to ensure your company

maximizes your smoke-free policy's potential health benefits and cost savings.

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8.0 CONCLUSION

In conclusion, laws against littering relative to cigarette butts could be better enforced.

Additional taxes might be levied on cigarette products that would then be directed to

environmental clean-up efforts. The tobacco industry should improve the biodegradability

of filters, reduce packaging waste, and educate its customers. Worksites and public buildings

should be encouraged or required to supply appropriate disposal mechanisms at all building

entrances. Public awareness campaigns about the magnitude and prevention of cigarette

consumption waste could be developed through partnerships among environmental groups,

health organizations, and environmental protection agencies. Tobacco production waste

should be a source of concern and regulation by governments throughout the world, it

contains numerous chemicals which may be considered health hazards, not the least of which

is nicotine produced in the manufacture of low-nicotine cigarettes.

Tobacco smoking causes death and disability on a huge scale and only about half of

smokers’ report enjoying it. Despite this, approximately 1 billion adults engage in this

behavior worldwide and only around 5% of unaided quit attempts succeed for 6 months or

more. The main reason appears to be that cigarettes deliver nicotine rapidly to the brain in a

form that is convenient, and palatable. Nicotine acts on the brain to create urges to smoke in

situations where smoking would normally occur and when brain nicotine levels become

depleted. Concern about the harm from, and financial cost of, smoking is mostly not

sufficient to counter this.

Governments can reduce smoking prevalence by raising the cost of smoking through

taxation, mounting sustained social marketing campaigns, ensuring that health professionals

routinely advise smokers to stop and offer support for quitting, and make available

pharmacological and behavioral support for stopping. If the government not take any action,

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second-hand smoke can cause premature death and disease in children and in adults who do

not smoke. Children exposed to second-hand smoke are at an increased risk for sudden infant

death syndrome (SIDS), acute respiratory infections, ear problems, and more severe asthma.

Smoking by parents causes respiratory symptoms and slows lung growth in their children.

Other than that, exposure of adults to second-hand smoke has immediate adverse effects on

the cardiovascular system and causes coronary heart disease and lung cancer. After that,

eliminating smoking in indoor spaces fully protects non-smokers from exposure to second-

hand smoke. Separating smokers from non-smokers, cleaning the air, and ventilating

buildings cannot eliminate exposures of non-smokers to second-hand smoke.

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