Question

Cigarettes are proven to lead to serious negative health effects for both smokers and those exposed to the second-hand smoke. In an effort to reduce smoking, the government requires the suppliers of cigarettes to pay a per-unit tax on each pack of cigarettes sold. Which of the following statement below is true regarding who would be most against this tax policy? Assume that the degree of opposition to the tax corresponds exactly to the increase in price paid by the buyers or the decrease in price received by the sellers for cigarettes, so you should consider how the tax changes those prices when selecting your answer. The correct answer depends on the price elasticity of demand, so explicitly state whether demand for cigarettes is price elastic or price inelastic and provide your reasoning. Support your answer with an illustration on a supply and demand graph and fully explain. Illustrate with a price elastic or price inelastic demand curve based on the reasoning provided, show the supply curve before and after the tax, and show how the incidence of the tax is shared between buyers and sellers of cigarettes (i.e the tax paid by consumers and received by sellers before and after the tax).

1. Cigarette manufacturers will be more opposed to this tax.
2. Cigarette smokers will be more opposed to this tax.
3. Both cigarette manufacturers and smokers will be equally opposed to this tax.

Answer 1

Tobacco is a demerit good. It is also a addiction good. Therefore, the demand for these goods are demand inelastic. The opposing of a tax will be higher from a party who bears the most burden of the tax. The share of tax that falls on to consumer is given as

The more price inelastic will be the demand the lower will be ed , hence the higher will be the tax burden to the consumer. In case of cigerrates the demand elasticity is less than 1 and hence the burden of the consumer is close to 1 or 100%.Then a tax will be more opposed by a consumer.

This is shown in the figure below

The tax increases supply from S1 to S2. The price rises from P1 to P2. The price that producer receive is P2-t. Then the burden of the tax on consumer is P1-P2/t. P2-P1 is quite higher or close to full tax. Then consumer will oppose more.

Therefore the correct option is

• Cigarette smokers will be more opposed to this tax.