CASE STUDY 2

Uniform Cigarette Tax Rates Seen to Burden Consumers

Adoption of flat rates, as sought by a bill filed at the House of Representatives urging the reimposition of
specific taxation on cigarettes, will "unduly burden" the smoking public, a paper published by the Center
for Research and Communication has reported. The CRC paper, titled "How to tax the cigarette industry"
and written by economists J. Antonio S. Buencamino, research tutor, corporate planning services division,
and Francisco G. Trinidad Jr, also a research tutor at the economic forecasting unit, said that if flat rates
are used, "manufacturers of low-priced non-native cigarettes will face rough sailing." Nonnative Virginia-
type cigarettes use blended tobacco and are usually packed in 20s, filter-tipped and wrapped with
aluminum tin foil and cellophane. Native cigarettes, on the other hand, use purely native tobacco and are
usually packed in 30s. Flat rates, the CRC report said, "will effectively, more than double the tax rates
these manufacturers are now paying. The smoking public will be unduly burdened, too." Low-priced
cigarettes, the CRC paper said, accounts for the larger share of the cigarette market, and even in the
United States, there is a notable shift to low-cost generic brands. The CRC report also argued that "over
the longer haul," though, the more enlightened policy would be to promote the upgrading of the low-
priced segment of the cigarette market. By using the additional tax revenues from the recommended
alternative tax system as a subsidy, the government can embark on a productivity and quality
improvement program for tobacco farmers," the CRC report said. Specific taxation is being assailed by
tobacco associations in the llocos region, which claim that adoption of uniform rates would eventually
price out the low-cost brands. Source: Business Section, Philippine Star, Nov. 12, 1992
Questions:
1. Is the proposed sales tax progressive or regressive? Who will be burdened most and why?
2. Will there be substitution between brands? Why?

CASE STUDY 3
Beer Sales on Downtrend, Taxes Blamed
Declining beer sales have reportedly hit San Miguel Corp. (SMC) and its chief rival Asia Brewery, Inc. If
beer business is not as healthy as it used to be about five years ago, it is due to the continuing downtrend
in the beer sales. Sales dropped seven percent last year, reversing the average growth rate of about 14
percent from 1984 to early 1990. The significant decrease in last year's beer sales was attributed chiefly to
the higher ad valorem tax from 37 percent to 60 percent that took effect in 1990-1991 period. This
situation adversely affected the industry's profit and loss statement. Aggravating this situation was the un-
favorable economic climate brought about by the natural calamities, making difficult for farmers,
fishermen, and ordinary wage earners who consume about 98 percent of the beer industry. These people
who consider beer drinking as a simple and wholesome pleasure paid P8.6 billion in taxes out of the total
P8.84 billion collected in beer taxes as cleaned for industry statistics. Amid this depressing economic
environment, San Miguel Corporation and Asia Brewery have launched a high-powered advertising blitz
using television, screen, and sports personalities in promoting their respective products.
Understandably, the strategy of these two rival corporations is to capture a bigger share in the market by
whetting the appetite of the beer drinkers and lead them to buy the beverage. Sad to say, the market did
not respond positively on the multi-million-peso advertising campaigns of these two corporations. This
could be gleaned from the fact that since the increase in ad valorem tax that took effect in 1990-1991 beer
sales fell to considerable levels. Not only that. Income taxes, value added taxes, and other business taxes
of the industry took a downtrend. Even the industry's over 270,000 retailers nationwide lost an estimated
P8.5 billion in revenues and about two billion in gross income. Apart from this, the income of the industry
and its haulers, distributors, sup- pliers, and dealers went down by P10 billion over the past two years.
What is even more disheartening is that more than 2,700 workers directly employed
by the industry lost their jobs, bringing un- told economic sufferings to their thousands of dependents.
Another round of beer tax increases will result in further decrease in sales and spawn chain of economic
problems including un- employment and slump in economic activities, industry leaders say. Another sad
footnote to the increase in ad valorem tax is that even the government's targeted amounts from beer sales
were barely met. (PNA) Source: Jake Espino, Business Section, The Sunday Bulletin, Sept. 20, 1992.
Questions:
1. Is the demand for beer price elastic or inelastic? Explain and illustrate.
2. What factors influence this elasticity?
3. Is specific tax a better alternative to raise tax revenue? Explain.

CASE STUDY 5
Substitution between Domestic and Foreign Goods Substitution between domestic and foreign goods and
services has reached an all-time high in the world today and is expected to continue to increase sharply in
the future. For homogeneous products such as a particular grade of wheat and steel, and for many
industrial products with precise specifications such as computer chips, fiber optics, and specialized
machinery, substitutability between domestic and foreign products is almost perfect. Here, a small price
difference can lead quickly to large shifts in sales from domestic to foreign sources and vice versa. Even
for differentiated products, such as automobiles and motor Cycles, computers and copiers, watches and
cameras, films and TV programs, soft drinks and cigarettes, soaps and detergents, commercial and
military aircrafts, and most other products that are similar but identical, substitutability between domestic
and foreign products is very high and rising.
Despite the quality problems of the past, U.S.-made automobiles today are highly substitutable for
Japanese and Euro- pean automobiles, and so are most other products. Furthermore, with many parts and
components imported from many nations and with production facilities and sales around the world often
exceeding sales at home, even the distinction between domestic and foreign products is fast becoming
obsolete. Should a Honda Accord produced in Ohio be considered American? What about a Chrysler
minivan produced in Canada? Is a Kentucky Toyota or Mazda which uses nearly 50 percent of imported
Japanese parts American? It is clearly becoming more and more difficult to define what is an American
automobile even after the American Automobile Labeling Act of 1992, which requires all automobiles
sold in the United States to indicate what per centage of the car's parts are domestic or foreign. Indeed,
one could even ask if the question is relevant in a world growing more and more interdependent and
globalized.
Source: "Honda's Nationality Proves Troublesome for Free - Trade Pact" The New Times, October 9,
1992; "Want a U.S. Car?" Read the Label, "The New York Times," September 18, 1994, and "Want to
Buy American?" U.S. News and World Report, October 10, 1994.
Questions:
1. What promotes substitution in this reading? How?
2. Explain and illustrate how substitution promotes consumers' welfare.
CASE STUDY 6
The Demand for Big Macs
McDonald's holds nearly a 30 percent share of the $65 billion U.S. restaurant business and 46 percent of
its $2.6 billion burger business. It serves more than 22 mil- lion customers per day and, with sales of
nearly $15 billion in 1993, dwarfs its competitors. After nearly three decades of double-digit gains,
however, domestic sales at McDonald's have been growing slowly since 1986 as a result of higher prices,
changing tastes, slow growth of the domestic economy, demographic changes, and increased com-
petition from other fast-food chains and other forms of delivering fast foods. Price increases at
McDonald’s exceeded inflation in each year since 1986 and in 9 of the last 17 years. The average check at
McDonald's is now $4 - a far cry from the 15% hamburger on which McDonald's got rich and customers
streaming to lower- pricing competitors. Concern over cholesterol and calories, as well as a slowing down
of growth of the economy and in personal incomes, have also reduced growth. In addition, the proportion
of the 15-to 29-year-olds (the primary fast-food customers) in the total population has shrunk from 27.5 to
22.5 percent during the past decade. Increased competition from other fast-food chains, other fast-food
options (pizza, chicken, tac0s, and so on), frozen fast foods, mobile units, and the vending machines have
also slowed down the growth of demand for Big Macs. McDonald's did not sit idle and tried to meet its
challenges head on by introducing a "value menu" in 1990 with small hamburgers selling for as 59 cents
(down from 89 cents) and a combination of burger, French fries, and soft drink for as much as half off. In
response to increased public concern about cholesterol and calories, McDonald's began publicizing the
nutritional content of its menu offerings, substituted vegetable oils for beef tallow in frying its French
fries, replaced ice cream with low fat yogurt, introduced bran muffins and cereals to its breakfast menu,
and even (unsuccessfully) introduced the MacLean Deluxe - a new reduced-fat, quarter-pound hamburger
on which McDonald's spent from $70 million to develop and promote. Furthermore, in response to
increased competition from frozen fast foods, mobile units, and vending machines, an increasing number
of McDonald's franchises have drive-throughs, from which they now generate almost half their business.
McDonald's is also expanding very rapidly abroad, where it faces much less competition and where there
is much more room for growth.
Source: "An American Icon Wrestles with a Troubled Future," The New York Times, May 12, 1991; and
"Too Skinny a Burger is a Mighty Hard Sell, McDonald's Learns," The Wal Street Journal, April 15,
1994.
Question: Illustrate and explain the changing demand for big Mac using the indifference curve and budget
line.