Question

Government is known to utilize a product's elasticity measures to set taxes and subsidies. Use this information to set policy on one of the following products: tobacco products, petroleum products, agriculture products, or medical products according to your goal. Research the government's tax/subsidy policy in these areas and any objectives of the tax policy. State your goal, your prescribed action, and why you believe it will work using the information you found.

(On medical products or petroleum products. Please I need help, I am stuck on this question.) With referrences please.

Answer 1

Answer:-

I chose: Tobacco products

The government's tax/subsidy policy in these areas and any objectives of the tax policy. In the United States, federal, state, and local governments tax tobacco. Tobacco products are taxed in two ways: the unit tax, which is based on a constant nominal rate per unit (that is, per pack of cigarettes), and the ad valorem tax, which is based on a constant fraction of either wholesale or retail price. Currently, federal taxes on cigarettes, small cigars, and smokeless tobacco products are unit taxes; federal taxes on large cigars are ad valorem taxes. Cigarette tax rates across the country, which vary widely from state to state and are levied on top of a federal rate of $1.0066 per 20-pack of cigarettes. States didn’t start taxing tobacco until the 1920’s, but by 1969, each state and the District of Columbia had followed suit. And although cigarettes are already one of the most heavily taxed consumer goods in the U.S., many states continue to target smokers with increased rates. In fact, effective this month, Vermont’s cigarette tax jumps up 13 cents to $2.75 a pack, sliding the Green Mountain State ahead of New Jersey into 8th in the ranking (Emanuel and Borean, 2014).

Goal:- My goal would be to lower the percentage of people who use tobacco products Prescribed action

Increase the price of selling and purchasing tobacco through taxation Why I believe it will work During my research, I found that the demand for tobacco products is not as elastic as demand for many other consumer products. I also founded that research has consistently demonstrated that increases in the price of tobacco products are followed by moderate falls in both the percentage of people smoking and the amount or number of tobacco products that remaining smokers consume.

The percentage of people smoking declines because tax increases discourage non-users from starting, encourage current users to quit and, also very important, discourage former smokers from starting again. Because increases in tobacco taxes result in higher tobacco prices for everyone, the effect of even small resulting reductions in tobacco use can be very large across the whole population. Depending on the amount of the price increase, a reduction in the consumption of tobacco products following increases in tobacco taxes can be huge. Furthermore, a World Bank review conducted in 1999 concluded that, price raises of about 10% would on average reduce tobacco consumption by about 4% (World Bank). This may not seem like much to some but it’s a start.