Question

The Premier is wrong about the effect of taxes on the consumption of cigarettes. Now that the tax on cigarettes is lower, it is true that the demand for cigarettes will increase, but this increase in demand will drive the price of smoking up, and in the end, there will be little change in the amount of smoking done. Comment.

Answer 1

The effect of cigarette taxes on consumption is influenced by the price elasticity of demand. If demand is inelastic, higher taxes raise revenue without greatly reducing consumption. If demand is elastic, such as with youth smoking, consumption decreases significantly with tax increases.

Step-by-step explanation:

The statement that lower taxes on cigarettes will lead to increased demand, but eventually drive prices up, resulting in little change in smoking consumption, oversimplifies the dynamics of cigarette demand. Taxes on cigarettes aim to raise government revenue and discourage cigarette use. The impact of taxes on consumption depends on the price elasticity of demand for cigarettes. If demand is inelastic, tax increases may not significantly decrease consumption but will increase revenue. Conversely, if demand is elastic, especially among youths, even a small tax increase can lead to a significant reduction in consumption. Moreover, government campaigns to discourage use may shift demand leftward, thus reducing consumption without relying solely on tax adjustments.