Excise Duties

Some goods impose real costs on people who aren't part of the original purchase at all: smoking creates healthcare costs that extend well beyond the smoker's own medical bills, burning fuel contributes to pollution costs borne broadly, and heavy alcohol consumption creates costs — healthcare, accidents — beyond the drinker alone. Economists call a cost like this, one that spills onto people outside the original transaction, a Pigouvian cost (named after the economist Arthur Pigou). A Pigouvian tax— which is what most excise duties actually are — is deliberately sized to make a good's price reflect more of its true, full cost to society, not just the cost to the immediate buyer and seller.

This is a meaningfully different goal from most taxes. Per Incentives, people respond to the incentives placed in front of them — taxing a specific behavior more heavily makes that behavior comparatively more costly, nudging at least some people toward using less of it. Excise duties are designed with that behavioral effect as a deliberate part of the policy, alongside the very real revenue they also raise — unlike VAT/GST or income tax, which aren't trying to change anyone's behavior, just raise revenue broadly.

Excise duties on goods viewed as vices are sometimes informally called a "sin tax" — a colloquial nickname, not a formal legal term.

A government adds a $2-per-pack excise duty on cigarettes, on top of whatever general sales tax or VAT already applies to the purchase.

This raises the price of a pack meaningfully above what production and distribution costs alone would justify. Some smokers — especially the most price-sensitive, like younger people or lower-income buyers — reduce how much they smoke or quit entirely; that deterrent effect is a deliberate part of the policy's design, not an accidental side effect. The revenue collected is also often earmarked toward healthcare costs connected to smoking, directly tying the tax back to the social cost that justified it in the first place.