Minneapolis city council sets floor price for cigarettes so that people will buy less

Minneapolis city council is applying some insights from Econ 101. Associated Press reports:

Smokers in Minneapolis will pay some of the highest cigarette prices in the country after the City Council voted unanimously Thursday to impose a minimum retail price of $15 per pack to promote public health.

The ordinance not only sets a floor price. It prevents smokers and retailers from getting around it by prohibiting price discounts and coupons, which several tobacco companies circulate online to lure customers and reinforce brand loyalty. The minimum price also applies to four-packs of cigars. Distribution of free samples is prohibited.

Consumer prices are expected to run even higher after taxes are figured in. While retailers will get to keep the extra money paid by smokers, the higher prices are expected to snuff out at least some of their sales…

…

Council President Andrea Jenkins said the price of cigarettes was one reason why she quit smoking eight years ago, and that she hopes the new minimum will encourage more people to stop or never start. [Emphasis added]

The city council’s action is based on the idea that if you make cigarettes more expensive then, ceteris paribus, people will buy fewer cigarettes. Well, ok, that makes sense.

Now apply that thinking to another price, say, the price of labor. If the quantity of cigarettes demanded falls when we raise the price of cigarettes, wouldn’t the quantity of labor demanded fall when we raise the price of labor?

That is exactly what happened when the minimum wage  — a “floor price” for labor  — was hiked in Minneapolis by the city council. As I wrote last year:

The Federal Reserve Bank of Minneapolis recently released its latest reports on the consequences of the Twin Cities’ minimum wage hikes…

Across the Mississippi in Minneapolis, the study found that, by 2021 Q4, the minimum wage hike led to:

“…an average decline in jobs of 1.7 percent, an average decline in hours worked of 1.3 percent, and an average decline in wage earnings of 1 percent. The largest effects are found in the restaurant and the retail industries, in lower-paying establishments, and for lower-paid workers.”

In the retail industry specifically, the hike reduced jobs by 28%, hours worked by 20%, and earnings by 13%.

In both cases, hikes in the minimum wage, a price floor, made labor more expensive and employers responded by buying less of it, just as Econ 101 would suggest.

I’ve written before about the lack of joined up economic thinking from policymakers in tax policy: They will often hike, say, cigarette taxes so that people will smoke less but pile taxes on work and investment under the opposite assumption that people will just go on working and investing as before. The same applies to regulatory policy, in this case regarding floor prices. If people will react to a hike in the price of cigarettes by buying less of them, why would we assume that they would respond differently to a hike in the price of labor?