Smuggling is the clandestine transportation of goods or persons past a point where prohibited, in violation of the law or rules. It happens because people are trying to:-
(1) Supply demand for some illegal goods or services
For services and goods such as drugs, supply for them are very low, since it is against the law. Since there exists a market for such goods, competition for these goods will drive the prices up due to the low supply. This gives merchants high cost incentives to smuggle such goods into the black markets to earn huge profits.
Furthermore, since drugs are a form of addiction, they are price inelastic in demand. A change in price brings about a less than proportionate change in quantity demanded. Drug addicts will take drugs no matter how expensive drugs are.
Making use of this concept, merchants will also increase the price of drugs to maximise their revenue.
(2) avoid paying taxes and levies on imported goods
Taxes discourage the supply of goods or services by increasing its cost of production, resulting in higher costs and lower profits (profit = TR - TC), and giving producers less incentives to produce their goods and services. Hence, motivated by this high cost of production due to taxes and levies, some producers will choose to smuggle in their goods instead.
For example, a smuggler might purchase a large quantity of cigarettes in a place with low taxes and smuggle them into a place with higher taxes, where they can be sold at a far higher margin than would otherwise be possible. It has been reported that smuggling one truckload of cigarettes within the US can lead to a profit of US$2 million.
But why prohibit certain goods and services? (from government's POV)
(1) Government wants to protect domestic industries and reduce competition from imports from overseas.
These imported goods will affect the sales of locally-produced goods that are close substitutes, especially if they are at a lower price. People will turn to cheaper alternatives, hence affecting these domestic industries, resulting in a shift in the demand of goods from domestic industries leftwards.
Example: Smuggling in China was booming and allegedly ruining many industries in the south of the country. It was said that $300m worth of contraband had been confiscated this year and that represented a mere fraction of the amount of goods involved.
(2) Question of morality: Government wants to protect its citizens, since goods such as liquor, cigarettes and drugs are generally harmful to many aspects of our lives.
The government understands that without government intervention, this will result in partial market failure, since the market economy is unable to account for the negative externality from the harm due to these goods (e.g. drugs). The price mechanism fails to bring about a socially efficient allocation of resources since the cost to society is unpriced by the price mechanism and is not included in the private costs of production. (There will be welfare loss due to over-supplying of such goods or services.)
Hence, in other words, prohibition of the importing of such goods and services is government intervention, while smuggling is simply the free market's revenge on over-regulation.
References:
1. Business: The Economy. James Morgan on the economics of smuggling BBC News (July 15, 1998)
(1) Supply demand for some illegal goods or services
For services and goods such as drugs, supply for them are very low, since it is against the law. Since there exists a market for such goods, competition for these goods will drive the prices up due to the low supply. This gives merchants high cost incentives to smuggle such goods into the black markets to earn huge profits.
Furthermore, since drugs are a form of addiction, they are price inelastic in demand. A change in price brings about a less than proportionate change in quantity demanded. Drug addicts will take drugs no matter how expensive drugs are.
Making use of this concept, merchants will also increase the price of drugs to maximise their revenue.
(2) avoid paying taxes and levies on imported goods
Taxes discourage the supply of goods or services by increasing its cost of production, resulting in higher costs and lower profits (profit = TR - TC), and giving producers less incentives to produce their goods and services. Hence, motivated by this high cost of production due to taxes and levies, some producers will choose to smuggle in their goods instead.
For example, a smuggler might purchase a large quantity of cigarettes in a place with low taxes and smuggle them into a place with higher taxes, where they can be sold at a far higher margin than would otherwise be possible. It has been reported that smuggling one truckload of cigarettes within the US can lead to a profit of US$2 million.
But why prohibit certain goods and services? (from government's POV)
(1) Government wants to protect domestic industries and reduce competition from imports from overseas.
These imported goods will affect the sales of locally-produced goods that are close substitutes, especially if they are at a lower price. People will turn to cheaper alternatives, hence affecting these domestic industries, resulting in a shift in the demand of goods from domestic industries leftwards.
Example: Smuggling in China was booming and allegedly ruining many industries in the south of the country. It was said that $300m worth of contraband had been confiscated this year and that represented a mere fraction of the amount of goods involved.
(2) Question of morality: Government wants to protect its citizens, since goods such as liquor, cigarettes and drugs are generally harmful to many aspects of our lives.
The government understands that without government intervention, this will result in partial market failure, since the market economy is unable to account for the negative externality from the harm due to these goods (e.g. drugs). The price mechanism fails to bring about a socially efficient allocation of resources since the cost to society is unpriced by the price mechanism and is not included in the private costs of production. (There will be welfare loss due to over-supplying of such goods or services.)
Hence, in other words, prohibition of the importing of such goods and services is government intervention, while smuggling is simply the free market's revenge on over-regulation.
References:
1. Business: The Economy. James Morgan on the economics of smuggling BBC News (July 15, 1998)
http://news.bbc.co.uk/1/hi/business/the_economy/133376.stm
2. Smuggling. Wikipedia.
http://en.wikipedia.org/wiki/Smuggling
2. Smuggling. Wikipedia.
http://en.wikipedia.org/wiki/Smuggling
Happy VBC-ing. Let's not give up hope :D
- HAIDEE
No comments:
Post a Comment