In: Economics
Excise tax rates on tobacco and tobacco products increase in March and September based on average weekly ordinary time earnings. Perform a web-search to determine the amount of excise tax charged (as at 1 January 2018) on a standard 20 packet of cigarettes. If the standard packet is sold for a price of $30, how much is the before tax price?
Illustrate using the demand and supply model, the effects of a tax imposed on sellers of tobacco products. Explain in detail who pays the tax (buyers and/or sellers) and discuss the role the price elasticity of demand plays in determining the impact on prices and quantity of tobacco products sold. Be explicit about any assumptions made in developing predictions.
Cigarettes excise tax rates vary across different states in USA. The average State cigarette tax is 1.72$ per pack.
Reference- https://www.tobaccofreekids.org/assets/factsheets/0097.pdf
If a standard pack is sold at $30 the before tax price is $28.28.
Initial equilibrium is at point e at the intersection of demand and supply curve. When a tax is levied on the sellers of tobacco products the supply curve decreases from the amount of tax. The new supply curve is s1 and the new equilibrium is at E1. The price paid by buyers increases from p to p1 and price received by sellers decreases from p to p2 and quantity reduces from q to q1.
A tax increases price paid by buyers and reduces price received by sellers and reduces quantity.
As can be seen from the below figure, when a tax is levied on any good the price paid by the buyer increases but this increase depends upon the elasticity of demand for that good.. When demand is more elastic than supply, producers bear most of the cost of the tax. Tax revenue is larger the more inelastic the demand and supply are.