Question

Part (c) Consider the following quotation: “When a tax is levied on a good, a share of it is paid by both the consumer and producer. In the case of cigarettes however much more of the burden of the tax is paid by consumers, even though the tax is levied on the suppliers of cigarettes.” Why might this be the case? In your answer explain both parts (sentences) of this statement. If the price of a packet of cigarettes increased by 10%, and in light of your explanation of the quotation, would you expect the quantity of cigarettes consumed to increase or decrease, and by more or less than 10%? Explain your answer.

Part (b) Taxation of cigarettes is often justified on the grounds that cigarette smoking creates externalities. What is meant by the term “externalities” in this context? Give two examples of externalities created by cigarette smoking and explain how a tax on

Answer 1

Answer:- part (c) It is truly said that the burden of tax levied on consumable goods is partly borne by the supplier and partly by the consumer.

But in case of cigarettes, maximum part of tax is paid by the consumers. Although, the suppliers do have to pay some portion of the tax levied on the good but the share is comparatively very less as that of consumers. This is because of the following reasons:-

• As we are aware that cigarette is a tobacco product and its price usually keeps on rising because of the increased tax rates levied on the product and whose burden is mostly placed on smokers to reduce its consumption as it causes a no. of health problems.
• To the contrary, increase in price of cigarettes hardly affects its quantity demanded because the consumers become habitual and it becomes difficult for them to reduce the level of consumption or to stop smoking at all.
• So, we can say that cigarettes have inelastic demand i.e. even large amount of price changes will result in small change in quantity demanded by the consumers in the market.

As per the above question, a 10% rise in the price of packet of cigarette may or may not lead to fall in quantity demanded. If it results in fall in quantity of cigarettes consumed, it will be less than the amount of increase in price of packet i.e. it will be less than 10% of the previous quantity demanded by customers.