Question

2. Elasticity of demand

The Czech government has raised the excise tax on tobacco products several times. Using price elasticity of demand, describe the potential impacts of this increase on the demand for cigarettes

Answer 1

Ans) Main idea÷ when government wants to raise more revenue with less deadweightloss, it taxes goods with less elasticity of demand.

Inelastic demand is when percentage change in quantity demanded is less than the percentage change in price.

Demand for tobacco is less elastic (or more inelastic) because it creates addiction. As a result, when government imposes tax on cigarettes, decrease in quantity demanded (or quantity sold/bought) is less. This enables government to raise more revenue with less deadweightloss.

This can be verified through different news that apper in the newspaper, stating that government expects to raise more revenue through excise tax on cigarettes and alcohol.

The above graph shows that when tax was T1, buyers paid P1 and quantity exchanged was Q1. With increase in tax to T2, buyers paid P2 and quantity exchanged is Q2.

Here we see that with increase in tax, price paid by buyers increased more but quantity exchanged reduced less.