Law of diminishing returns means that if one variable factor of production is increased while the others remain constant, the overall returns will relatively decrease after a certain point. For example, if more and more labour are added to harvest a wheat field, at some point each additional labour will add relatively less output than his predecessor did, simply because he has less and less of the fixed amount of land to work with.
“The Diminishing Returns to Tobacco Legislation” written by Pierre Lemieux, http://www.pierrelemieux.org/artdiminish.html, is about the law of diminishing returns regarding the tobacco legislation. According to Pierre, the current efforts to reducing in tobacco consumption of government, such as forcing producers print shocking illustration of tobacco related diseases and panic warnings on the cigarette pack and cigarette taxation, have already achieved most of the possible improvement. For his argument for diminishing returns to government intervention, he pointed out that shocking therapy such as color pictures illustrating the presumed effects of tobacco related diseases has no more effects; the impact of shocks and the information decays with time. He also pointed out that the phenomenon is also illustrated by cigarette taxation; inputting sin tax on cigarette, at the beginning, reduced the demand, but the effectiveness of this plan is also decreasing; cigarettes have an inelastic demand due to the fact that there are no close substitutes and addictive product.
The possible solutions that decreases the cigarette consumption would be larger tax increases. Another option is restricting the places where people can smoke or is sold in separate store or limited places. Imposing higher tax on cigarettes cause the price to increase; when the price of a product changes, it affect, in common sense, the quantity traded will be changed. If we think only demand and supply and government intervention is successful, the demand for cigarette will decrease. Unless the manufacturer reduces the production costs and thus the price decrease, then price increased by tax will work as a price floor. The supply will be surplus. However, when we consider elasticity of the cigarettes and find out it is inelastic product; the resulting increase is greater than the decrease in the quantities demanded, we can conclude that the main reason government put sin taxes on cigarette is because they can increase their tax revenues.
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