Question

“The government will increase taxes on all types of cigarettes.” Using the concept of elasticity and supply/demand, who will be hurt by the tax increase and will the price increase itself create any change to the quantity supplied or quantity demanded?

Answer 1

Cigarettes are the addictive goods. A person using cigarettes or addicted to cigarettes will buy them no matter how high the price gets. This makes the demand for cigarettes inelastic i.e. the change in the demand for the cigarettes are less affected by any change in the price. And the demand curve is like a vertical line.

If the government decides to increase the taxes on the cigarettes this will increase the price. Because the demand is inelastic this increased taxes will be transferred to the consumers of cigarettes. If the demand was elastic an increased cost would have transferred to the supplier because increasing the price then would reduce the demand and decrease the revenue.

Even after increased price, the demand will more or less is going to be the same. But, an increased price of the cigarettes will discourage the new smokers especially the teenagers. The purchasing power of teenagers is very less as compared to adults who have jobs and can afford higher prices. This will also decrease the peer pressure in teenage groups and have double the effect of getting their addiction away.

Conclusion: As the demand for the cigarettes is elastic an increased price will be shifted to the consumers and this will decrease the demand and decrease the quantity but only for those who have less addiction and lower purchasing power like teenagers. Adults will be smoking more or less the same as before.