Australia: Tobacco Control and Bootlegger Paradise

Australia is the darling of anti-tobacco extremists.  They tout that country as the model for draconian cigarette regulation and taxation.  Australia imposed mandatory plain packaging last December, and exorbitant excise taxes have raised the price of a pack of cigarettes to 16 Australian dollars (AUD). 

A new report (here) from KPMG tracks the effect of these policies on smoking prevalence and consumption.  The unintended consequences remind one of America’s Prohibition Era fiasco.

KPMG compares Australia’s exorbitant per-pack prices with those of other countries in the region (all in AUD), including Cambodia (1.12), Vietnam (1.08), Indonesia (1.43), Thailand (3.07) and Papua New Guinea (5.37).  It comes as no surprise that these differences have created a huge illicit market in Australia, accounting for about 13% of all cigarette consumption. 

The Aussie black market offers smokers an array of smuggled products.  Counterfeit cigarettes are inferior products manufactured offshore and packaged to resemble popular brands.  KPMG also identifies a type of contraband cigarette called “illicit white” which is produced specifically for smuggling.  One such brand, Manchester, is so popular that it has a market share of 1.3%.  In 2012, Manchester was only found in Sydney and Melbourne; this year it was available in 13 of the 16 cities surveyed by KPMG. 

I discussed earlier this year how prohibitive policies and prices in New York (population 20 million) have cost the state a quarter billion dollars that wound up in criminal hands (here).  In Australia (population 23 million), the toll is larger: KPMG estimates that the government has lost $1 billion in excise taxes to the black market.

In their popular book Freakonomics Steven Levitt and Stephen Dubner argue that “Morality…represents the way that people would like the world to work – whereas economics represents how it actually does work.” (emphasis in original) 

Australia’s treatment of smoking as a moral issue has resulted in Prohibition-Era tobacco policies and real-world economic consequences.