Cigarette Smoking and Taxes (adapted from lesson in economics.about.com)
Cigarette taxes are a hot topic in Economics for many reasons. Cigarettes are considered goods with a negative externality. This implies that some external parties are negatively affected by the private transaction of others. For instance, cigarettes produce second hand smoke such that even nonsmokers are adversely affected by cigarette consumption. In addition, there are large health care costs of cigarette smoking. Therefore, public policymakers often want to reduce cigarette consumption. There are two ways that they can achieve this goal:
One way to reduce smoking is to reduce demand for the good. This will shift the demand curve to the left, and the quantity of cigarettes consumed will be reduced. The second way to reduce smoking is to raise the price of cigarettes, which will decrease the quantity demanded of cigarettes.
1. What are some ways public policymakers can reduce demand of cigarettes (shift of the demand curve)?
2. Assume the government decides to implement a tax on cigarette manufacturers in order to raise the price of cigarettes. How much does the amount of smoking respond to changes in the price of cigarettes? Be sure to describe your answer using the concept of elasticity.
3. Who pays the larger burden of the tax (buyer or seller)? Why? Be sure to describe your answer using the concept of elasticity.