'Cigarette tax hike would benefit Tennessee residents' discuss.

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IB1Economics

21/11-07

Cigarette tax hike would benefit Tennessee residents

  1. a) indirect tax is when the firms collect the tax and then pay the government

b) Specific tax is when the same amount of money is taxed for a specific unit of a good or service.

2) Today the indirect tax for a cigarette is the specific tax of 1 cent a cigarette; the consumers of cigarettes in Tennessee will not be paying a lot of tax for their consumption of the demerit good, a good which has a negative spill over on the society.

Figure 1.

However if the specific tax goes up, there will be a change in the supply curve to be steeper and the government revenue from sales of cigarettes. However because the good is assumed to be inelastic, the incidence of the tax will fall on the consumer as can be seen in Figure 1. Nevertheless the producer will also suffer from the tax raise; its total revenue was has shrunk.

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“In Tennessee, studies show 14,500 youths become regular smokers every year.” This new legislation is thought to bring this number down and decrease the market for cigarettes. If there are less people who begin smoking than those who quit or die, then the market for cigarettes will gradually decrease until there is no demand for cigarettes left.

3) Because the government is raising tax for cigarettes, they are also lowering tax for food. If food is assumed to be elastic, its responsiveness to price is high, then the demand for food will rise as shown in Figure 2. ...

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