Law of Diminishing Returns

Law of Diminishing Returns is the production process where one input increases while the other inputs stay constant. When one input increases there will be a point where the marginal product will begin to decrease and causes a diminishing return.

Lemieux states that there are diminishing returns to tobacco legislation. I will examine this article and explain the main points and how it relates to Microeconomics.The main points in the debate are: People that smoke will become numb to the health risks and graphics posted on the cigarette packs. The Government will need to keep escalating the percentage of the graphics on the packs. The most people who have already quit smoking are not smoking and the people who are smoking are still smoking despite the graphics posted on the packs. In the 10 year period from 1985-1995 every 2.8% increase in taxes 1% of smokers quit. In the 4 year period from 1995-1999 every 4.36% that taxes were increased 1% of smokers quit (p.3).

The point that lessens the argument for me is Lemieux states that the consumers will try to get around the Government taxes & regulations by smuggling cigarettes (p. 6). This lessens the debate as Lemieux is for increasing the graphics on the cigarette packs and increasing the taxes to a point of decreasing returns to regulation.

I estimate that the point of diminishing returns for the Government is any increase in the rate of intervention above the period from 1995-1999. From 1995-1999 the rate of smokers quitting was 2.75% per year and in the prior 10 years the rate was only 1.8%. In the 10 years prior the tax increase was 5.2% a year as from 1995-1999 the percent of tax increase was 12%. This increase of 12% from 5.2% saw a jump of .95% year over year in the number of quitters.

Lemieux states that prohibiting more "public places" could provide a solution that would increase the government's production and decrease their diminished returns.

Since smokers are quiting there will be a drop in demand which will cause surplus of cigarettes. A surplus would typically cause a drop in price. However assuming the government taxation includes a price floor it will be difficult to increase demand for the cigarette firms.

This will affect Sin Taxes as the lower the demand means that simply raising the tax rate will necessary raise the tax revenue equally creating a more elastic demand.


Lemieux, P. (2001, Mar 19). The Diminishing Returns to Tobacco Legislation. The Laissez Faire City Times. Retrieved on January 30, 2012 from http://www.pierrelemieux.org/artdiminish.html