Question

Background Information:

A tax on Cigarettes introduced in Mexico in 2012 increased the price of Cigarettes
by about 10%. An evaluation of the first two years of this measure found that Cigarette consumption fell
on average by 7.6%, with a larger decrease (11.7%) in low income households. The study also
estimated an increase in consumption of alternatives to smoking, particularly Nicotine patches, of
2.1% (AYA, 2017)

Question 1:

Draw a demand and supply diagram for the market for Cigarettes.
Name and fully label your diagram including both axes, and indicate and explain points of
interest using P for price (P1, P2 etc) and Q for quantity (Q1, Q2 etc). Draw the demand curve
assuming the elasticity for the whole Mexican economy holds. (Don’t use actual numbers, it
can’t be exact with the information given – just decide roughly how steep or flat to draw it,
and give a reason for your choice).

Question 2:

Some experts recommend a public campaign to raise awareness about the health effects of
too much Cigarettes either instead of, or combined with a tax.
i) Redraw your diagram from (Question 1) above (that is, before a tax is imposed) to
illustrate the impact of such a campaign on the market for Cigarettes, and explain your
diagram.

ii) Compare and contrast the impact of an awareness campaign with that of a tax on
Cigarettes with respect to changes in both price and quantity, and the impact on
government revenue. Will an awareness campaign have a bigger or smaller impact
on consumption of Cigarettess by low income Mexican households compared with the
economy as a whole?

iii) Discuss the impact of combining an awareness campaign and a tax on the quantity of
Cigarettes consumed. (No need to illustrate).

Answer 1

# Demand and suppply Curve for market of Cigarettes------

The supply curve is upward sloping curve with unitary Elasticity of Supply ( Es=1) ,while the demand curve for cigarettes is inelastic (Ed<1) because cigarette smokers are not much sensitive to price change

#Ans---2) Impact of public awareness campaigns on market for cigarettes-------

*(1)---- when people are aware of health effects of cigarettes smoking ,thr demand for cigarettes decreases , consequently ,the demand curve shifts leftward.

See the graph------

The new equlibrium point = E²

Equilibrium Quantity =Q²

Equilibrium price =p²

Due to public awareness of ill effects of cigarettes, the demand, equlibrium price and quantity all decrease...

*(2)------

Impact of tax on market e cigarettes--------

When govt imposes tax on cigarettes, the supply curve will shift leftward and due to this------------

The new equilibrium point =E²

Equilibrium Quantity =Q²

Equilibrium price = p²

See the graph------

Comparing the effect of awareness campaign and imposition of tax on cigarettes Consumption-------

If we compare both graphs minutely, we find that in both cases, tha Consumption of cigarettes has decreased , but tax Imposition puts less impact on smoking habits of people as habitual of smoking are less sensitive to price change .

The people can reduce cigarette Consumption only the realize ill its ill-effects.

IMPACT ON GOVT REVENUE--

Due to tax Imposition, the govt collects Revenue, that is

OQ²× p²p¹

IMPACT ON LOW INCOME HOUSEHOLDS------

The awareness campaigns have SMALLER impact on cigarettes Consumption by low income households as compared with economy as a whole.

*(3)------ IMPACT OF COMBINING AWARENESS CAMPAIGN & TAX ON QUANTITY OF CIGARETTES CONSUMED-------

See graph-----

The graph shows that there is bigger decrease in cigarettes Consumption as compared to change in cigarettes price

Initial Quantity = Q¹, new Quantity = Q³( Decreases)

Initial price =P¹, new price = p³( little bit Decreases)

Hope you got my point.

Thanks