Question

Which of the following is the correct answer to the question: Why do smokers pay almost all the taxes assessed on cigarettes?

I. Because cigarettes are addictive, the demand for them is relatively elastic when compared to the supply curve of cigarettes.
II. Because cigarettes are addictive, the demand for them is relatively inelastic when compared to the supply of cigarettes.
III. Cigarette manufacturers can very easily escape a state tax by selling in a different state.

Answer 1

The correct answer is option II.

Step-by-step explanation:

When a tax is imposed on a commodity, the tax burden is shared between the buyers and the sellers. The share of tax burden depends upon the elasticity of demand and elasticity of supply.

In the case of cigarettes, most of the tax burden is borne by the buyers. This is because the demand for cigarettes is relatively inelastic. Cigarettes are addictive so even if its price increases due to the imposition of the tax, the buyers will still purchase the same amount as they are addicted to it.