The issue that keeps coming up regarding plain packaging is “Why the tobacco firms care?” Why if the policy has resulted in greater tobacco consumption do the major firms care? Indeed, why didn’t they voluntarily adopt plain packaging themselves?
The important thing to remember is that the tobacco firms – like all other firms – don’t want to maximise sales or consumption of their good per se, they want to maximise their own profit.
So what impact could plain packaging have? Well here is (anti-smoker) Harry Clarke and David Prentice explaining:
An immediate effect of plain packaging is to reduce product differentiation thereby making cigarette brands closer substitutes. This reduces prices and increases consumption.
Here is Christian Kerr indicating that this is exactly what has happened:
Plain packaging laws, which came into force in December 2012, have instead boosted demand for cheaper cigarettes, with reports of a more than 50 per cent rise in the market for lower cost cigarettes.
What impact overall does this have?
Step up the Baumol sales maximisation model:
The TR curve is the total revenue curve and the TC curve is the total cost curve. Firms that profit maximise set output and earn revenue where the first derivatives of these two curves are equal (the slopes of the curves are parallel). That is at the Xm point. A firm that is maximising output (or sales or consumption) is at X* – but the level of profit for that firm is reduced. While total revenue is higher than the profit maximising level of output, costs are even higher.
Contrary to the policy intent we see an increase in smoking (although it isn’t clear if existing smokers are smoking more, or new smokers have taken up the habit), and a decrease is profitability. How this can be described as being a welfare enhancing policy is unclear.