South Africa's Vaping Excise Tax
South Africa taxes vaping liquid to discourage consumption and raise revenue, illustrating how indirect taxes can address market failure.
Key figures
Initial vaping duty
R2.90 per ml
South Africa introduced the excise duty on vaping liquid from 1 June 2023.
2024 vaping duty
R3.04 per ml
The 2024 Budget increased the excise duty on electronic nicotine and non-nicotine delivery systems.
2026 vaping duty
R3.29 per ml
The excise duty was increased again in 2026, showing that the policy remained in place.
Estimated illicit cigarette market
58%
Researchers estimated that illicit cigarettes represented about 58% of South Africa's cigarette market in 2022. This figure is for cigarettes, not vaping products, but illustrates the country's wider enforcement challenge.
At a glance
- South Africa introduced an excise duty of R2.90 per millilitre on vaping liquids from 1 June 2023.
- The government increased the vaping duty to R3.04 per millilitre in the 2024 Budget, and the tax remained in place in later years.
- An indirect tax raises firms' costs and the market price, which can reduce the quantity of vaping products consumed.
- For a negative externality of consumption, the market may overconsume because marginal private benefit is greater than marginal social benefit.
- The effectiveness of the tax depends on price elasticity of demand, enforcement, substitution between vaping and cigarettes, and the size of the external costs.
Background
Electronic cigarettes, commonly called vapes, became increasingly popular in South Africa before they were brought into the excise-tax system. Unlike traditional cigarettes, vaping products had previously not been subject to the same type of specific excise duty on the liquid they contained.
An indirect tax is a tax placed on expenditure on a good or service. It is normally collected from producers or sellers, who may pass some or all of the tax on to consumers through a higher price.
Vaping can be analysed in IB Economics as a possible negative externality of consumption. This occurs when consuming a good creates costs for third parties that consumers do not fully consider when deciding how much to buy. Examples could include health costs borne by a publicly funded healthcare system or harm imposed on other people.
It is important to distinguish external costs from costs experienced by the consumer. A user's own health risks are private costs rather than external costs. Concerns about consumers underestimating health risks, addiction or young people making poorly informed choices can instead be linked to demerit goods and imperfect information.
In the standard negative consumption externality model, marginal private benefit (MPB) is greater than marginal social benefit (MSB) because consumers do not take all external costs into account. The free-market quantity is therefore greater than the socially efficient quantity.
What happened
South Africa introduced an excise duty on vaping products from 1 June 2023. The initial rate was R2.90 per millilitre of vaping solution. The duty applied to nicotine and nicotine-substitute solutions, bringing vaping products into the country's excise-tax system.
In the 2024 Budget, the government increased the duty to R3.04 per millilitre. The Minister of Finance referred to concerns about the growing use of electronic cigarettes, particularly among young people, when discussing the measure.
The tax is a specific indirect tax, meaning that a fixed amount is charged for each physical unit of the product, in this case each millilitre of vaping liquid. A larger quantity of liquid therefore attracts a larger total tax liability.
The tax remained in place after 2024. The rate increased to R3.18 per millilitre for 2025/26 and to R3.29 per millilitre in 2026.
From an economic perspective, the tax increases the cost of supplying vaping liquid. If producers pass some of the tax on to consumers, the market price rises and the quantity demanded falls. This can reduce consumption and may move the market quantity closer to the socially efficient level if vaping creates external costs.
Timeline
23 February 2022
The South African government announced plans to introduce an excise duty on vaping products.
1 June 2023
The vaping excise duty took effect at R2.90 per millilitre.
21 February 2024
The 2024 Budget announced an increase in the vaping duty to R3.04 per millilitre.
2025
The vaping excise duty increased to R3.18 per millilitre for the 2025/26 fiscal period.
30 April 2026
The vaping excise duty increased from R3.18 to R3.29 per millilitre.
Using this in the exam
Use this case when explaining or evaluating indirect taxes, negative externalities of consumption or government intervention.
For an externalities question, explain that consumers may consider their own private benefits from vaping but not all costs imposed on third parties. On a negative externality of consumption diagram, show MPB above MSB. The free-market equilibrium occurs where MPB equals MSC, producing quantity Qm. The socially efficient quantity Qs is lower, where MSB equals MSC. The difference creates a welfare loss because the market consumes more than is socially efficient.
You can then introduce South Africa's tax. From June 2023, vaping liquid faced an excise duty of R2.90 per millilitre, which was increased to R3.04 per millilitre in 2024. An indirect-tax diagram shows the tax increasing firms' costs and shifting the supply curve vertically upwards by the amount of the tax. The consumer price rises, the producer price falls and equilibrium quantity decreases.
If the tax reduces vaping consumption towards Qs, it can reduce the welfare loss associated with the externality. It can also generate government revenue that could be used for healthcare, education or other government spending.
Price elasticity of demand is central to the evaluation. If demand for vaping products is price inelastic, a higher price causes only a relatively small decrease in quantity demanded. The tax would then raise substantial revenue but may produce only a limited reduction in consumption.
A strong evaluation point is South Africa's existing illicit cigarette market. Researchers estimated that illicit cigarettes accounted for about 58% of the cigarette market in 2022. Do not say that 58% of vaping products are illicit. There is no equivalent figure here for vaping. Instead, use the cigarette evidence to show that weak enforcement and illegal markets can reduce the effectiveness of excise taxation.
Also avoid saying that all health damage from vaping is a negative externality. Harm experienced directly by the consumer is a private cost. The negative externality model applies only to costs imposed on third parties.
Syllabus topics
Test yourself
Questions this example can answer
- Using a real-world example, explain how an indirect tax can reduce the overconsumption of a good with negative externalities.
- Using a real-world example, explain how a negative externality of consumption can lead to market failure.
- Evaluate the use of indirect taxation to reduce the consumption of demerit goods.
- Discuss the effectiveness of indirect taxes in correcting negative externalities of consumption.
- Evaluate the importance of price elasticity of demand when a government taxes a harmful good.
Evaluation
Arguments in favour
A higher price can reduce overconsumption
The excise duty raises the cost of supplying vaping liquid. If some of the tax is passed on to consumers, the market price rises and quantity demanded falls. This can move consumption closer to the socially efficient quantity if the original market quantity was too high.
The tax can help internalize external costs
Where vaping imposes costs on third parties that are not included in the market price, an appropriately sized tax can make consumers face more of the social cost associated with their consumption. This can reduce the welfare loss caused by the externality.
The government receives tax revenue
Consumers may continue purchasing vaping products even after the price rises. The resulting excise revenue can be used for other government objectives, including healthcare or public-health programmes, although the revenue is not automatically spent for these purposes.
Young consumers may respond to higher prices
If younger consumers have limited disposable income, an increase in the price of vaping products may discourage some purchases or prevent some consumers from starting. The size of this effect depends on how price-responsive demand is.
Arguments against
Demand may be price inelastic
Consumers who are dependent on nicotine may respond relatively little to a price increase. If demand is price inelastic, the tax raises prices and government revenue but causes a smaller reduction in consumption, limiting its ability to correct the market failure.
Consumers may switch to illicit products
A larger gap between taxed and untaxed prices can increase the incentive to buy products through illegal markets. If enforcement is weak, consumers may avoid the tax, reducing both the effect on consumption and the government's tax revenue.
The tax can be regressive
Lower-income consumers spend a larger proportion of their income on a given amount of vaping products. If demand is inelastic, they may continue purchasing the product and bear a relatively large financial burden from the tax.
Substitution between vaping and cigarettes matters
Some consumers may view vaping and combustible cigarettes as substitutes. If vaping becomes relatively more expensive, some users could switch towards cigarettes rather than stop using nicotine products. The overall effect therefore depends on the relative taxes and prices of the two products.
Context and assumptions
The tax should reflect the size of the external cost
In theory, a corrective tax works best when the tax per unit reflects the marginal external cost at the socially efficient quantity. If the tax is too low, overconsumption remains. If it is too high, consumption may fall below the socially efficient level.
Private health costs and external costs are different
Health damage experienced by the person vaping is a private cost, not automatically a negative externality. The externality argument applies to costs imposed on other people or society, while imperfect information and addiction provide separate arguments for intervention.
The tax is based on liquid volume
South Africa applies a fixed charge per millilitre. Products containing different nicotine concentrations can therefore face the same tax per millilitre, meaning the tax is not directly proportional to nicotine strength or estimated health damage.
Enforcement affects effectiveness
A tax only changes behaviour if consumers and sellers cannot easily avoid it. South Africa's large illicit cigarette market shows why tax administration, border controls and enforcement can be as important as the tax rate itself.
Taxes can work alongside other policies
Governments can combine taxation with age restrictions, information campaigns, product standards and advertising rules. A policy mix may address both external costs and problems such as imperfect information more directly than taxation alone.
Key terms
- Negative Externality of Consumption
- A cost imposed on third parties as a result of consuming a good or service, causing marginal social benefit to be lower than marginal private benefit.Taught in Unit 2.8: Market Failure: Externalities and Common Pool Resources
- Indirect Tax
- A tax imposed on expenditure on a good or service, which increases firms' costs and usually raises the price paid by consumers.Taught in Unit 2.7: Role of Government in Microeconomics
- Market Failure
- A situation in which the free market fails to allocate resources efficiently, resulting in a loss of economic welfare.Taught in Unit 2.8: Market Failure: Externalities and Common Pool Resources
- Marginal Private Benefit
- The additional benefit received by a consumer from consuming one more unit of a good or service.
- Welfare Loss
- The loss of total economic welfare that occurs when the market produces or consumes a quantity different from the socially efficient quantity.
- Price Elasticity of Demand
- A measure of the responsiveness of quantity demanded to a change in the price of a good or service.Taught in Unit 2.5: Elasticities of Demand
- Illicit Trade
- The illegal production, distribution or sale of goods that avoids taxes, regulations or other legal requirements.
References
Sources
- 01
Taxing of Vaping Tobacco products with effect from 1 June 2023
South African Revenue Service
- 02
2024 Budget Speech
South African Government
- 03
Legal Counsel - Secondary Legislation - Tariff Amendments 2026
South African Revenue Service
- 04
Tax revenue lost due to illicit cigarettes in South Africa: 2002-2022
BMJ Open
- 05
South Africa's vaping tax - a bold move for public health?
BMJ
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