The World on Wednesday – government failure in Germany

A favourite GCSE question on tax is… ‘one reason for the relatively high price of tobacco in the UK is a high level of taxation. Do you agree that tobacco should be highly taxed?’

A good answer will recognise the positives of taxing tobacco such as reducing consumption of a demerit good and increasing revenue for the government. It would also look at the negatives such as equity issues.

This article from Germany adds to the argument against highly taxing tobacco. In Germany, 20% of all cigarettes are illegally brought in from foreign countries as smokers try to avoid the increasing tax. By putting up the tax the government have only succeeded in increasing the number of illegal cigarettes (26 million) consumed and has actually lost revenue. This article could be used to help answer this question or for any lesson on market or government failure.