"Government Plans Cigarette Tax Raise".

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Sagar Manilal

20-Feb-2004

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Government Intervention

Government Plans Cigarette Tax Raise

Cigarettes are a very popular demerit consumer good. A de-merit good is one which is undesirable, likely to be over-consumed, and have negative externalities. As this good is a habit or even a necessity to the smokers, it then has an inelastic demand curve. Inelastic demand is where quantity demanded or supply changes proportionately less than the price. The diagram below shows that an increase in the price of cigarettes is inelastic and as the price rises, the total revenue will also rise. Total revenue is the quantity sold at a given price; it is also the sales revenue or the income from sales. The quantity demanded changes by a smaller percentage to the increase in price. Demand is the amount of some goods or services, which a consumer is willing and able to buy per period of time. This shows that the total revenue will increase.

To cut down on the purchase of the demerit good by the American public, the government has intervened to various reasons. In order to have less consumption of cigarettes, the government has imposed indirect taxes. They have done this for various reasons. These taxes may have been added to raise the tax revenue to fund the government funding. Also to discourage the consumption of demerit goods such as alcohol, gambling, tobacco, as in this case it has been done for tobacco. Another reason the taxes may have been imposed could be for environmental benefits to lower pollution (passive smokers). There are several other methods the government can use to reduce consumption such as advertising against cigarette smoking, however the author does not provide these options, nor does the author justify why increasing taxes is the best option.

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The diagram below shows how the specific tax imposed on the cigarettes has an effect on the market. Specific tax is an indirect tax of a fixed sum of unit sold. As this tax is imposed, the supply will decrease. The tax on the cigarettes has increased even more than before; from $.75 to $1.25 in August 2002.

(Diagram)

These high prices in the market will create alternative means to obtain the cigarettes such as the internet, “Philosophy senior Brad Jackson purchases his cigarettes from Europe via the internet”. Since the tax is only applicable in the state ...

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