Electronic Cigarettes and the Peak Theory of Economics

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First of all, IANAE (I am not an economist). But I have been studying economics since the summer of 2007. Since that time, I have run across many economic views. The one that makes the most sense to me is the Austrian School of Economics.

In the most basic terms, the Peak Theory of Economics proposes that the price of something will rise until it doesn't. I know I have oversimplified it, in a free market the peak would probably coincide with the equilibrium of supply and demand. Peak prices are exaggerated by interference in the market. Where the price should stay static or fall slightly (in a free market), political interference causes the price to artificially rise for a time then fall more sharply than it would have if there weren't political interference.

To illustrate, let's look at electronic cigarettes (for example, Blu Electronic Cigarettes). The innovation of this product has emerged as a direct result of political interference. Taxes, and the threat of taxes, as well as bans on certain kinds of products has resulted in new market innovations (which was not the political goal). The economic factor of taxes makes alternatives surface. Prior to the artificial cost imposed by government, entrepreneurs had less incentive to investigate alternatives. But when taxes and bans came on the scene, entrepreneurs released investment into expensive alternatives which brought the price of those alternatives lower and lower.

So both taxes and artificially lower demand will probably affect the price of regular (combustion based) cigarettes. This will result in more political interference. What will the politicians do after that? Hard to say. Would they bail out the big tobacco companies? Unlikely. Will they start banning electronic cigarettes? I think that's more likely. Whatever they do, it will only exaggerate the problem and create more artificial peaks in prices, further perpetuating the Peak Theory of Economics.

Posted via email from Anthony Martin's Weblog


One Comment

  1. Mieke says:

    I think I should get cap & tax credits to sell by switching to the electronic smokes. Of course FDA wants in on the action, they don't know how yet, but they are starting with embargos and bans which have been successfully countered so far, but who knows, I may be brewing my own soon.

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