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'Cigarette tax hike would benefit Tennessee residents' discuss.

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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. ...read more.


Figure 2. According to the article, "the state has the country's highest average food tax at 8.4%." Food is a necessity and is an elastic good thus no matter how expensive it is, people will still consume food. But if the tax goes down, people will be richer in real terms and will have more money to spend on other goods besides food. Other markets will grow and the economy will grow as well. 4) The change to the taxes can be seen as a benefit to the state. Cigarettes are a demerit good, having a negative spill over on society, which the government is trying to lower the sales of. There are far too many smokers and their number must be reduced for people inhaling second hand smoke. If the number of smokers increase, the production possibility will decrease from A to B in Figure 3. ...read more.


the body, hence decrease the need for health care, which would also increase the PPF as less people will become sick and more are able to work. Because it is a necessity and something we need everyday, it takes up a considerable amount of money to pay for the food, and everyone consumes food. Therefore the decrease in the amount of money spent on food can be used to purchase other goods, whose market people were not a part of before but now more people are willing and able to buy. The only stakeholder not gaining from this legislation is the firms producing cigarettes. With the new specific tax cigarette firms will decrease their total revenue. The firms will then see that the cigarette business is dying and reallocate their resources to another good which will bring more profit. However finding a producer substitute for cigarettes will be a challenge. ?? ?? ?? ?? IB1Economics 21/11-07 ...read more.

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