Home > Uncategorized > New research suggests that government cap cigarette prices and raise an extra £500m per year in doing so – Tobacco Research

New research suggests that government cap cigarette prices and raise an extra £500m per year in doing so – Tobacco Research

New research suggests that government cap cigarette prices and raise an extra £500m per year in doing so – Tobacco Research.

Researchers at Bath University have proposed a new regulatory approach to prevent tobacco companies making excessive profits.  The profits of tobacco companies in the UK are remarkably high, much more so than other industries such as food and drink.  If adopted, in the UK or other countries, this measure would have a profound effect on the profitability of tobacco companies and make them a much less attractive investment for pension fund managers.

The approach borrows from the model used to regulate natural monopolies like water companies, and involves capping the wholesale price eg RPI- x%.   In the UK two tobacco companies dominate the market: Imperial and Japan Tobacco (formerly Gallagher), so effectively are monopoly companies, able to exploit their market dominance to generate excess profits.  In any other industry we might expect the competition authorities to take an interest, but it would hardly be in the public interest to stimulate competition in the tobacco market by splitting these companies up.  Far better to restrict their ability to make excess profits by capping wholesale prices.

“Regulation would set a maximum price that cigarette companies could charge for their product, based on an assessment of genuine operational costs. Retail mark-up would not be affected and nor would the price that consumers pay, but the excess profit currently accrued by cigarette manufacturers would be transferred to the Treasury through increased tobacco taxes.  The system would be set up at no cost to the consumer or taxpayer, funded instead through a levy or licence fee paid by tobacco companies.” say the authors of the report.

Radical tobacco control measures to reduce smoking prevalence once proposed typically become adopted in one or more jurisdictions within a few years and then a snowball effect takes hold.  Smokefree laws were unknown before this century, but now they are rapidly spreading in all parts of the world.  How long before politicians and policy makers adopt this profit capping proposal?

One thing is for sure: in considering whether to divest, future regulatory risk just got a whole lot higher.

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