A country that does not currently tax cigarettes is considering the introduction of a $0.40 per pack tax. The economic advisors to the country estimate the supply and demand curves for cigarettes as:
Qd = 140,000-25,000P
Qs = 20,000+75,000P
where Q= daily sales in packs of cigarettes and P = price per pack. The country has hired you to provide the following information regarding the cigarette market and the proposed tax:
a) What are the equilibrium price and quantity with no tax?
b) What price and quantity would prevail after the imposition of the tax? What portion of the tax would be borne by buyers and sellers, respectively?
c) find out the deadweight loss from the tax. Could the tax be justified despite the deadweight loss? What tax revenue will be generated?