Question

During the 1960s many high-profile studies purported to show a direct link between cigarette consumption and heart disease. In response to these studies the government began to implement higher cigarette taxes as well as other restrictions that increased the cost of doing business for major cigarette manufacturers. How would you expect supply, demand, and the equilibrium price and quantity to change?

Answer 1

When there is a tax or other restrictions imposed by the government on the manufacturer of cigarette then this will increase the cost of production of cigarette and fall in the consumption of cigarettes. Thus, as a result the supply of cigarettes decreases and demand for cigarette also decreases. This will lead to shift the demand curve and supply curve leftwards. This shift decreases the equilibrium quantity of cigarettes but effect on equilibrium price is ambiguous because it will be depend upon the magnitude of the shift of demand and supply curve.