Tobacco Subsidies in United States totaled $530 million from 1995-2005. To some students in my Enriched Economics class this figure staggared them with a contradiction of logic. On one hand, my students are enundated with facts about cigarette smoking and cancer from a federally funded program, Just Eliminate Lies. On the other hand, they hear the federal government subsidizes the very products that JEL is trying to eliminate. Why would the government subsidize big tobacco?
The econ 101 answer is that the government has imposed a price floor on tobacco sales. A price floor establishes a minimum price on a product. In the diagram, the equilibrium price is 50 cents. But a floor pushes the price to 70 cents. Notice that the quantity demanded decreases from 400 to 200 when the floor is legislated.
But legislating a price floor the quantity of smokers decrease, but the revenue increases for $200 to $262 (.70 * 375), assuming inelastic demand. The great German philosopher, Immanuel Kant believed that your actions should be consistent with your ethics. The government's apparent contradictory actions are consistent with their belief that smoking kills. This joke is taken from Aristotle and an Aardvark go to Washington shows how sometimes actions and beliefs conflict.
A woman is in her doctor's office, when she suddenly shouts out, "Doctor kiss me!" The doctor looks at her and says that it would be against his code of ethics. She pleads with him to kiss her and each time he refuses. Finally, he says, "Look. I'm sorry. I just cannot kiss you. In fact, I probably shouldn't be sleeping with you."