In: Economics
Cigarettes in Australia have long been subject to excise tax – a
per cigarette tax levied on the suppliers of cigarettes. (The tax
applies to all tobacco products, however for the purposes of this
exam assume cigarette and tobacco consumption are the same thing).
In 2016 the federal government announced that the excise tax rate
for cigarettes would rise by 12.5% a year for the next 4 years.
Over this period tax revenue collected from the sale of cigarettes
has increased considerably. Legal cigarette consumption has fallen
to an all-time low in Australia due to a combination of the tax on
cigarettes, and public health initiatives such as plain packaging,
health warnings and banning advertisements.
Part (a) Consider the following two policies aimed at reducing
cigarette smoking:
(i) A tax on the suppliers of cigarettes, and (ii) The public
health campaign initiatives.
Illustrate both of these policies separately using a fully labelled
and explained demand and supply diagram for each of parts (i) and
(ii). Do not use actual numbers; this is intended as a theoretical
exercise.
Compare and contrast the impact on equilibrium price and quantity
of cigarettes of each of these policies, explaining your answer
with reference to the diagrams.
Consider the impact of each policy on government revenue. Explain
your answer. Can the impact on government revenue be illustrated on
either of your diagrams? If so, indicate and explain the area on
the diagram/s that represents government revenue
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 (c) 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
cigarettes could potentially address both of these. Using a fully
labelled and explained diagram explain how a tax can increase
efficiency in the cigarette market. What size tax should be levied
to maximise efficiency in this market? (Indicate the efficient tax
size on your diagram – no actual number required).
Part (d) Is a tax on cigarettes a regressive tax or a progressive
tax? Explain your answer, including a definition of both
terms.
Part (e) 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. [
Despite efforts to reduce drug consumption in the United States over the past 35 years, drugs are just as cheap and available as they have ever been. Cocaine, heroin, and methamphetamines continue to cause great harm in the country, particularly in minority communities in the major cities. Marijuana use remains a part of adolescent development for about half of the country's young people, although there is controversy about the extent of its harm.
Given the persistence of drug demand in the face of lengthy and expensive efforts to control the markets, the National Institute of Justice asked the National Research Council to undertake a study of current research on the demand for drugs in order to help better focus national efforts to reduce that demand.
This study complements the 2003 book, Informing America's Policy on Illegal Drugs by giving more attention to the sources of demand and assessing the potential of demand-side interventions to make a substantial difference to the nation's drug problems. Understanding the Demand for Illegal Drugs therefore focuses tightly on demand models in the field of economics and evaluates the data needs for advancing this relatively undeveloped area of investigation.