Final answer:
A study by Saffer and Chaloupka, referenced in the article "Saved by Sin Taxes," suggests the price elasticity of demand for alcohol is inelastic, meaning changes in price have little effect on the quantity demanded by consumers.
Therefore, option A is correct.
Step-by-step explanation:
According to the article "Saved by Sin Taxes," a study by Saffer and Chaloupka estimated that the price elasticity of demand for alcohol is inelastic. This indicates that when the price of alcohol increases, the quantity demanded reduces only modestly. The concept of elasticity demonstrates whether consumers are responsive to price changes and, in the case of addictive substances like cigarettes, demand remains inelastic due to addiction. This allows governments to increase tax revenue without significantly reducing the equilibrium quantity consumed by raising taxes on these goods, as consumers continue to purchase despite higher prices.
For example, increasing cigarette prices by 10% only leads to around a 3% reduction in the quantity of cigarettes smoked, resulting in an elasticity of demand of 0.3, which is inelastic. Such inelastic demand implies that producers can pass the higher costs incurred from taxes onto consumers in the form of elevated prices, and consequently, the total consumption does not drop substantially.