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Paper 1 real world example: Market

failure in the vaping market.

 Table of contents 
The Australian government takes action in the vaping market
Questions

The Australian government takes action in the vaping market

Vaping is now one of the biggest challenges for schools in
Australia with large numbers of pupils becoming dependent and
even making themselves sick from using vapes. Terry Slevin from
the Public Health Association of Australia has described vaping
as a public health crisis as more and more young Australians
become addicted to this nicotine-based product in colourful
packaging that offers a variety of attractive favours. About 22% of
Australians aged 18-24 have used an e-cigarette or vaping
device at least once, data last year showed. It could be the
cigarette market of the 1960s and 70s.

The Australian government has responded aggressively to the vaping challenge with a range of measures to
try and reduce consumption. It will be illegal for retail stores to sell vapes which will now need to be sold
through pharmacies. There will be a ban on imported non-prescription vaping products, minimum quality
standards on vapes and limits on the product’s nicotine concentration. Vape products will need to be in plain
packaging and single-use, disposable vapes will not be allowed. The overall aim of the Australian government
is to make the only way to purchase vaping products legally through pharmacies with a prescription, meaning
it will end the recreational vaping market.
The growth of vaping in many countries started with the emergence of e-cigarettes as a cigarette substitute.
Many people saw e-cigarettes as a way of giving up their smoking habit. E-cigarettes did not seem to have the
same health consequences as regular cigarettes and the growth of e-cigarettes was seen as a public health
benefit.

But like any market, producers of e-cigarettes saw an opportunity to grow their market. By targeting vapes to
young people who liked the idea of using a product that gave them the same supposed ‘cool, rebellious image’
as cigarettes gave to their parent’s generation. So e-cigarettes or vapes found a new market in young people
who would in the past have taken up smoking.

Whilst many health professionals see vapes as less harmful than cigarettes they still carry health problems
such as the risks it poses to someone's heart and circulatory system, and the way vapes can damage a
person's lungs and respiratory system. Vapes can also have a negative effect on someone's teeth and gums.

If the long-term health consequences of vaping really do adversely affect the health of users then there may
well be negative externalities in terms of the impact on national health services and you can also add to that
the secondary ‘vaping’ of people in the company of vapers.

The Australian government's move to regulate the vaping market will be looked at closely by other countries
that face the same public health challenges, particularly among the young. One of the key challenges the
Australian government will face is whether their aggressive regulations lead to the development of a parallel
market.

Questions

Questions

Answers

a. Explain why the vaping market might lead to market failure. [10]

Market failure is where the allocation of resources in a market does not maximise the welfare
(community/social surplus) of people in society. It means marginal social costs do not equal marginal social
benefits in a market.

Vaping is associated with negative externalities which have an adverse effect on third parties through passive
inhalation of vape fumes. It may also be the case that people who vape are sick because of their use of the
product which impacts the health service of a country and this means the service is less available to others.

This is shown in the diagram where

MPB is greater than MSB and market
output where MPB = MPC is greater
than the socially efficient output where
MSB = MSC. The yellow triangle
shows the welfare loss.

Vapes may also be over-consumed

because people do not act in their own
best interests and consume the
product even though they know the
product might harm their health in the
long run. Some vape consumers may
suffer from information asymmetry and
overconsume the good because they
are unaware of the negative effects of
vaping.

This over-consumption is shown in the diagram where market output Q is above the socially efficient output
Q*
 b. Evaluate the view that regulation is the best way to reduce the market failure associated with the
vaping market. [15]

Regulation is the use of laws and rules in the vaping market to reduce the market failure associated with
vaping.

The regulations that could be used in the Australian vaping market include:

Age restrictions
Bans on single-use vapes
Controls over the nicotine content
Only allowing prescription-provided vapes
Plain packaging
Controls over imported vaping products
Only allowing vapes to be sold through pharmacies.

These regulations are used to reduce

the demand for vapes and this is
shown in the diagram. As demand for
the vaping market output, Q moves
closer to the socially efficient output,
Q*.

The welfare loss triangle becomes the

smaller green triangle compared to the
yellow triangle which existed before
the regulations.

Evaluation

Imposing regulations will be a cost to the Australian government.

Regulations can be difficult to impose and Australian firms may find their way around the regulations.

Parallel markets for vapes might develop.

If the vaping market contracts this could lead to business failure and unemployment.

Regulations could be seen as government overreach and against people's civil liberty.

An alternative policy approach to reducing the market failure associated with vaping might be the use of
taxation, education and advertising.

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