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Utah House Passes $1 Cigarette Tax Hike

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Introduction

COMMENTARY COVERSHEET Economics commentary number: _______________________HL Number 1_______________ Title of Extract: _______Utah House Passes $1 Cigarette Tax Hike________ Source of extract: _______ CS News__________ Date of extract: _________Nov 29, 2010_________ Word count: ______651________ words Date the commentary was written: _________ Sections of the syllabus to which the commentary relates: _____Section 1________ Candidate name: _______________ Candidate number: _________________________ Utah House Passes $1 Cigarette Tax Hike March 08, 2010 - SALT LAKE CITY - A bill passed by the House here in a 19-8 vote would increase the state's cigarette $1, to total $1.695, The Associated Press reported. Supporting lawmakers have argued the tax increase would generate $43 million in the coming fiscal year. The bill now goes to Gov. Gary Herbert, who has said he's opposed to any increases, but hasn't voiced a veto threat to a tobacco tax hike, according to the report. Republican Rep. Paul Ray, who proposed the measure, said he's "comfortable" the governor will be on board. "He hasn't told me specifically he is," Ray said in the AP report. ...read more.

Middle

and SMB (Social Marginal Benefit). The private marginal costs is the price an individual has to pay to get one more unit of the product and the private marginal benefit is the profit the individual gets from one more unit. These costs and benefits often are very different from the social marginal cost, which is the cost the society pays for one ore unit of the good, and the social marginal benefit, which is the society's benefit from one more unit. This difference is the cause of market failure, because the market fails to account for the costs society has to bear and the benefits it can get from the goods. This is where the government has to step in. The government imposes taxes to reduce the bought amount of goods, which have negative externalities and subsidies, which are money paid to businesses to encourage production and consumption of goods with positive effects on society. The externality mentioned in this article is the negative externality of passive smoking. In a perfect market QS cigarettes would be sold at a price of PS. ...read more.

Conclusion

When a tax is imposed, this will effectively contract supply, because it will increase the price producers are willing to sell their goods at. The red rectangle represents the governments tax revenue. Due to the low PED of cigarettes, the price increases by a lot (from P to P2), while quantity sold barely changes (Q to Q2). This difference leads to a large consumer share of the tax, meaning that most the tax will be payed by the consumers rather than by the producers. The government uses this fact to increase their tax revenue, which is the total money the government earns from taxes. When they impose a tax on a good with inelastic demand, the revenue will increase. In the article it looks like the government assumes the cigarettes to be perfectly inelastic in demand, because it mentions that the revenue increase has never been as much as anticipated, because even though only few people stop smoking, there are still people who will stop smoking. This means that the government revenue is not increased by as much as expected, but also that there are less smokers, which counters the negative externality. ...read more.

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