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Social Cigarettes Case Study

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Cigarettes are demerit goods, defined to be a good resulting in negative impacts on the consumer usually unknown or ignored by the consumer. Cigarettes as a demerit good usually have negative externalities of consumption (NEC), where consumption causes a harmful effect to a third party; in this case, cigarettes produce fumes harmful to inhale. To reduce demand for demerit goods, the government may place a tax on the good, e.g. tobacco tax which is the initiative taken by the California State. Indirect taxes are those imposed by a government on goods/services in order to discourage consumption of ‘harmful’ goods or generate tax revenue for a government The market for cigarettes is an example of market failure: The intersection, Marginal social …show more content…

Price elasticity of demand (PED) should be relatively lower than price elasticity of supply (PES); in this case, the tax incidence on consumers, being important stakeholders is greater than the tax incidence on producers as consumers are unresponsive to changes in price, producers can pass on a relatively large burden of tax onto the consumers as they’re unresponsive. The economic incidence indicates the extent to which someone is made worse off by the …show more content…

Secondly, indirect taxes is a regressive tax; therefore, there is an increase in income inequality. Lastly, reduction in cigarette consumption is low in the short run due to the level of PED. However, advantageously, higher government revenue is achieved, as PED levels are extremely inelastic. As a result, the government will be able to fund production for merit goods in US $. Finally, cigarette consumption falls, saving 100,000 lives as stated in the article. Also, in the long run there is more time to explore for possible alternatives. In conclusion, in the long term, the desired outcome of fewer smokers in California will be achieved as a result of the government imposing higher taxes on cigarettes. Consumers as stakeholders will brace the large effects as the burden of tax will be higher and cigarettes will be much more expensive due to inelastic

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