Question

Australia’s police forces and border forces have warned that rapid rises in the tax on cigarettes have had unintended consequences of encouraging illegal activity such as smuggling, with proceeds funding other criminal activities.

Explain why this might be the case. In your answer refer to the role that elasticity of demand plays in making illegal activity more profitable.

Answer 1

As we know, demand of tobacco product is somehow inelastic because smoking and all such products are the habit which is hard to kick. This means that, a large change in the price shrinks the quantity demanded a little only a very huge change in price can decrease its demand.

As in the case, there would be high rise in the tax of cigarettes which caused price to rise. But, because its demand is inelastic but the supplier tried to do is to earn more profit by selling at a price higher than the before tax price but less than the after tax price .thus ,this would encourage more customers to buy from them because although it is less than the after tax price that they would get from others. Thus, by seeing this all other suppliers also started this and start selling illegally because they don't want to loose customers which would help them in the long run to earn more profit. Thus, illegal activities kept on increasing and e can say that increase in price of cigarettes due to increase in tax leads to the increase in illegal activities.