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Estimated Elasticity of Demand for Cigarettes

College students -0.906 to -1.309

Secondary school students -0.846 to -1.450

Adults, long-run, permanent change in price -0.75

Adults, short-run, permanent change in price -0.40

Adults, temporary change in price -0.30

Based on the data above, discuss why public health officials generally advocate the use of cigarette taxes to reduce teenage smoking, while state and local governments often use these taxes to raise revenue to fund their services.

Hint for answering the problem

If the absolute value of the elasticity coefficient is higher than 1, consumers' reaction to price changes is significant. In other words, if the price of cigarettes goes up, people will react to this price increase by smoking much less.
If the absolute value of the elasticity coefficient is lower than 1, consumers' reaction to price changes is not significant. In other words, if the price of cigarettes goes up, smokers will not reduce significantly their purchases of cigarettes. Consequently, a tax increase will result in higher revenue.

 

Business Economics, Economics

  • Category:- Business Economics
  • Reference No.:- M925713

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