At what point does smuggling negate the health gain from tobacco duty rises?

Until just a few years ago the words 'illegal tobacco' seldom, if ever appeared in the press and media. It's not that the smuggling of tobacco didn't take place (how many folk brought home from overseas a couple of hundred fags for Uncle George or Grandma) or even that there weren't sufficient examples to make police, trading standards and customs keen on sending out press releases when arrests were made.

Now is different. The 'illegal cigarettes' story is a mainstay of the local press (maybe only topped by cannabis factories and 'nuisance' motorcycles) and a regular item on the agenda of local councils:

During the past month, officers from trading standards gathered almost 100,000 cigarettes and 37kg of hand-rolling tobacco, worth more than £40,000, from retailers in operations that also targeted premises in Leeds, Kirklees and Wakefield.

The seizures included counterfeit, non-duty paid and incorrectly-labelled cigarettes and tobacco. Since April 2014, West Yorkshire Trading Standards has seized almost 700,000 cigarettes and 300kg of hand-rolling tobacco.

Stoke-on-Trent City Council officers have seized 14,000 counterfeit cigarettes and 5kg of hand-rolling tobacco in a joint operation with Staffordshire Police.

The operation focused on the sale of illicit tobacco at nine premises in Hanley, Tunstall and Cobridge.

A BRADFORD shopkeeper has been prosecuted for a second time for selling illegal cigarettes and counterfeit tobacco.

Hemen Ahmed Hussain, of Chislehurst Place, Little Horton, was given a 150-hour community order by magistrates for possessing 2,500 cigarettes and 3.2kg of hand-rolling tobacco with an intent to supply.

The goods were seized by officers from West Yorkshire Trading Standards (WYTS) following a visit to Baz's off-licence in Southfield Lane, Little Horton, in September last year.

A Salford couple have been jailed after smuggling 25 tonnes of fake tobacco in a fraud costing the taxpayer almost £4m.

Feng Gao and his partner Mingshu Yang shipped boxloads of illicit hand rolling tobacco into the country.

The criminal duo, of St Heliers Drive, Salford, concealed the illegal tobacco in false soles and shelves as they shipped shoes and furniture to the North West.

The reason for this explosion in illicit tobacco sales is pretty simple - in the UK up to 88% of the recommended retail price for cigarettes is tax. And this means that avoiding paying this duty is a very profitable business. A year or so ago the Daily Mirror published a list of Britain's top twenty tax dodgers - nine of this were wanted for smuggling cigarettes, a fact that tells us just how profitable the dodging of cigarette duty is these days. And with each price escalation the more attractive smuggling gets as a business proposition for the unscrupulous, corrupt and criminal.

As it stands (and it rather depends where you look for data - the tobacco companies have higher estimates than HMRC which has higher guesses than the tobacco control industry) smuggled tobacco represents somewhere between 10% and 20% of total UK consumption. I'm going to plump for the figures used by LACORS (Local Authorities Coordinators of Regulatory Services) who put the figure at 17%. And local government recognises that the smuggling problem is significant:

Increased smuggling leads to the wide availability of cheap cigarettes to the poorest people thereby maintaining high smoking rates among disadvantaged groups; and contributing significantly to widening health inequalities

The question here is whether the regulatory and enforcement agencies - police, trading standards, customs - are able to keep on top of a growing problem. And whether the duty escalator, for all its good intentions, is now having the unintended outcome of promoting criminality while, in effect, reducing the price of tobacco in our poorest communities. Moreover, the unregulated distribution of tobacco means that it sits in the same car boot or dingy flat as illegal drugs and counterfeit booze.

There has to come a point at which the gain from increasing the price is lost - it becomes so prohibitive that most people turn to illegal and smuggled product. And if this happens then the use of price as a tobacco control tool is broken. Indeed for deprived communities this is perhaps already the case meaning that, for the poorest smokers the high price is de facto a ban so they turn to illegal supply. And if the supply of illegal drugs is any sort of guide then the steady trickle of press releases from local agencies about illegal tobacco stands to become a flood as those agencies replace shouting about small victories while knowing that they are losing the battle against the smuggler and street distributor.

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Haggle! A comment on behavioural pricing.

When you buy some Euros or Dollars for your trip abroad, you probably do a little research. You check out on-line financial information aggregators, you’ll look at your own bank and maybe some well know high street finance brands. And you’ll pick the one offering the lowest rate and buy your currency.

It will never have crossed your mind to haggle. You simply take the price you’re offered – it’s the best rate after all! Well you should haggle and if you do the chances are you‘ll get a better rate.

However, as consumers we are trapped like rabbits in the headlights – we believe too often that the price we’re given is the price we’ll pay. Which means that the seller can play differential or discriminatory pricing games with us. And behavioural pricing is just the latest in a long line:

What if when you bought a new Mac book, the price was higher because your tweets constantly referenced your love and devotion for Apple? What if Orbitz used the fact that your Facebook Likes include “Party Rocking in Miami” to charge you more for a flight to Miami?

This is called online behavioral pricing. It’s a consumer’s worst nightmare as it uses the traces of your online identity to maximize prices on the products and services you want most. It’s also an ecommerce merchant’s dream.

Now I guess that some folk will see a problem with this practice – I can hear the calls for “price transparency” linked to cries that the government must act to stop innocent consumers getting ripped-off by wicked marketers playing with their “data”. And the response will look like this:

The Labour leader says that the Government must take a more positive approach to stop British consumers from being exploited by “predatory” companies.

In an interview with The Daily Telegraph, he says a tough new consumer watchdog should be created to limit pension fees, car parking charges and airline levies.

The kind government will take away that consumer “nightmare”. And, of course, we’ll all pay more. People who plan their travel well-ahead will pay higher rail fares because it’s not ‘fair’ that the latecomers pay more. You won’t be able to pay a premium rate to jump the queues at Alton Towers because some mums can’t (or won’t) pay that extra. Everywhere we look prices will be higher, choice will be poorer and all because we were suckered into believing we are being "ripped off".

The alternative is for us to learn how to haggle (unless like me you’re fortunate enough to be married to someone who gets a thrill out of a little haggling). Why should we take the price that Apple thinks we should pay? Right now they’re using the information available to them as a means of setting a price maximum – they’ve no interest in setting this below their price minimum. Therefore, we should set about finding out what that latter figure might be – they’ll sell the new Mac Book to us at that lower price for sure!

And when you’ve found that price, pick up the phone, speak to the merchant and say you’ll buy it for a little bit less! We don’t need Ed Miliband’s “tough new consumer watchdog”, we don’t need to be frightened away from on-line markets by scary “consumer’s worst nightmare” stories, we simply need to start with the idea that the price we’re given is the starting point not the end.

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The Telegraph's New Puritan crusade continues...

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In recent times the Daily Telegraph has become the chosen vehicle for adherents to the Church of Public Health to peddle their myths and lies. And now they're upping the game by claiming that the Prime Minister has ordered that minimum pricing or unit-based taxation in included in the forthcoming "alcohol strategy".

The Prime Minister has ordered officials to develop a scheme in England to stop the sale of alcohol at below 40p to 50p a unit in shops and supermarkets. Ministers could copy Scottish proposals, which would ban the sale of alcohol below 45p a unit, or bring in a more sophisticated system of taxes based on the number of alcohol units contained in the drink. 

Apparently Mr Cameron is taken in by lies:

Mr Cameron is thought to have opted for a “big bang” approach to the alcohol problem after noting the success of the ban on smoking in public places. 

In public health terms the smoking ban has been at best a damp squib and at worst has halted the decline in smoking by forcing smokers into private "drinky-smoky" places where they don't face the sniffy opprobrium of non-smokers.

The idea of minimum pricing is peddled to us with claims that the only people who would pay the cost are either chronic alcoholics with bottles of White Lightning or unpleasant wall-perched chavs with cans of lager. The rest of us - sensible drinkers all - will not even notice.

The worst thing about all this is that those street drinkers and hooded youths will do one of three things - change to a different drink, buy illegally smuggled booze or drink moonshine. And they'll still end up in hospital with liver problems.

What is truly offensive about this is that people who need help - care and appropriate medical treatment - are to be taxed rather than treated. And leading the charge is a doctor:

“Most health experts feel that changing pricing is the most effective way of achieving results,”

Those "health experts" are, to use a technical term, talking out of their respective bottoms. The most effective way is to treat the person not the product, to reduce harm not to eliminate the possibility of harm and to recognise that drinking is integral to our culture not a sin to be punished.

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Why the top law schools can charge more despite greater competition

A chance encounter got me to thinking about the impact of competition on price - or more specifically at the conditions where increased competition might result in existing suppliers increasing rather than reducing price. The chance encounter was on twitter with legendary legal blogger, Charon QC and concerned the response of private law colleges to the arrival of other suppliers. The dear blawger argued – from knowledge and experience – that the response of said colleges would be to increase prices (of which more later). Hence the thinking since classical economic theory tells us that when supply increases, prices in the market fall.

Except that this appears not to be the case. These chaps (Chen & Riorden) suggest that specific conditions (duopoly and oligopoly) exist where the addition of new competition can result in prices increasing rather than reducing.

In a discrete choice model of product differentiation, the symmetric duopoly price may be lower than, equal to, or higher than the single-product monopoly price. Whereas the market share effect encourages a duopolist to charge less than the monopoly price because a duopolist serves fewer consumers, the price sensitivity effect motivates a higher price when more consumer choice steepens the firm's demand curve.

Got that?

If the addition of more law college places does not create an effective competitive market (i.e. the existing oligopoly is sustained albeit with more firms) then it is as likely that existing suppliers will increase their prices in response to new competitors. The question then becomes a matter of what it is that the consumer is buying.

For law schools, the answer has always been that the elite private schools offer a better chance of preferment post-qualification. In a more competitive market – one where more lawyers are trained but there are no more placements – then the premium for the elite schools is clear and justified. What students buy isn’t a better education but an increased chance of getting the placement that provides access to future success.

The problem here isn't the supply of legal training but the supply of places where that legal training is applicable. And the "who you know" principle gives an advantage to established, successful and elite institutions. And they will cash in on that advantage.

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