Cigarette Tax Case Analysis

Article: Smokers, retailers burn as Pennsylvania cigarette tax rises.

This article discuss the introduction of an excise tax, “when the producer or seller who pays the tax to the government is expected to try to recover or shift the tax by raising the price paid by the buyer” imposed on cigarettes in the us state of Pennsylvania and how the increase in price of a packet of cigarettes will effect the primary stalk-holders of the cigarette market. In this case the consumer, the sellers and the government.

Cigarettes are a demerit good. “A good whose consumption is considered unhealthy, degrading, or otherwise socially undesirable due to the perceived negative effects on the consumers themselves” they are often overused because people aren't

To reduce the demand and therefore consumption of cigarettes. To correct the market failure and climate the welfare loss the tax has to be equal to the negative externality, therefore the MPC+tax meets the MPB curve at equilibrium quantity(Q*). The price for cigarettes will now be higher(P2) however it doesn't equal the tax as the burden is shared between the consumer and producer. The government also does it for tax revenue. which is the difference between P* and P2 times Q* (the shaded part on graph 2). In this case because of the 1 dollar increase in tax the government will make $425 million dollars

Because 0.5<1 cigarettes in Pennsylvania are price inelastic or unresponsive. This means that because of their addictions people will keep on smoking regardless of the price. for example Brent Johnson who “It is what it is,” after saying that he would give up his habit. This unresponsive allows the producers to pass most of the tax burden to the consumer.

Advantages and disadvantages.

The disadvantages are, firstly because of the increase in price, there will be a decrease in disposable income for smokers, this is because they will have to spend a greater portion of their earnings on the cigarettes. This causes a reduction in strands of livings. Secondly because Pennsylvania is surrounded by states with a smaller tax, smokers will leave the state and spend their money elsewhere, this could cause unemployment and poverty. Further reducing living standards. It also increase income inequality as the tax is fixed so the poor and the rich pay the same price.

The advantages are higher government profit so the government can invest in merit goods and reduction of smokers in the long