To what extent is an increase in taxes an effective way to correct a negative externality of consumption in the case of tobacco.

Negative externality of consumption is a type of market failure in which Marginal Private Benefit (MPB- the demand of consumers at present situation) is higher than Marginal Social Benefit (MSB- the demand of consumers in the optimal state of the market). The difference between the two constitutes the external cost, and the market not operating in its optimal equilibrium (the Qopt and Popt) causes a welfare loss.An increase in taxation would result in a leftward shift of the supply curve, as the increase in taxation increases of the costs of production. The shift in the supply curve will result in an increase in the price of tobacco, which means there will be a smaller quantity demanded (Qd) following the law of demand which states that as the price of a good increases, quantity demanded decreases. This measure is considered as partly effective, as (together with legislation imposed) it could manage to reduce cigarette purchases, as the products become more expensive. The quantity demanded and supplied, is now closer to the optimal quantity (Popt, Qopt) than Pm1 and Qm1, so we see the partial correction of the externality. However, the quantity change is small, particularly due to the inelastic Price Elasticity of Demand (PED) of addictive goods, such as tobacco which causes the change in price to be higher than the change in quantity demanded (Pm₂Pm₁ > Qm₂Qm₁). Such a change is burdening the consumers, without really solving the problem, as there also is a decrease in social surplus (both consumer surplus and producer surplus deceased as price increased and quantity is less) rendering both consumers and producers to be worse off.  Thus, a better solution would be to achieve a shift in the demand curve rather than the supply curve, as this would lead to a fall in price and quantity demanded. The most effective way to reduce demand in the case of tobacco is by influencing the cconsumers' tastes and preferences which is done through appropriate campaigning against smoking, and/or legislation prohibitting smoking in public areas, limiting the sale of tobacco etc.