Question

Government is known to utilize a product's elasticity measures to set taxes and subsidies. Use this information to set policy on tobacco products. 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.

Answer 1

When it comes to government subsidies, there are none. Earlier there was the Transitional Tobacco Payment Program or the Tobacco Buyout; and it dates back to Depression-era when a tobacco quota program was established. The subsidy was created to limit how much tobacco a farmer could grow to ensure to control supply and demand, and the farmers benefits from this subsidy. The Fair and Equitable Tobacco Reform Act of 2004 by President Bush back was signed into law in 2004; ending the program. However the act provided eligible tobacco quota holders and producers an annual transitional payment for 10 years with payments starting in 2005 and ending in 2014

GOAL: My goal would be to continue the high tax rate selling and purchasing of on tobacco products. This will creates additional revenue and also create an incentive to help smokers quit smoking.

Why I believe it will work: With a high tax rate, it will discourage young people from starting to smoke. For those who are currently smoking, a high tax might price tobacco products out of some smoker’s price range and encourage them to quit. My research reveals that the demand for tobacco products is not as elastic if compared to the demand for many other consumer products. A high tax rate on tobacco has a direct relationship with demand and price, thus impacting the elasticity of demand; high tax, lower demand of tobacco products.