Q1.Using economic theory you have learned explain why the sales of the impulse items have dropped as a result of the tobacco taxAccording to the law of demand, the demand curve flows downwards. There are two types of changes that can occur on a demand curve: movement along the demand curve and shift of the demand curve. Changes in the prices of a commodity can result to a movement along the demand curve while a shift in the demand curve is caused by other factors other the price of that commodity.
It could be as a result of changes in the income level, expectations of a price change, change in taste and preference or changes in prices of other goods. The sales of impulse goods and services have dropped as a result of changes in the prices of the cigarettes and can therefore be explained using the theory of shift in the demand curve. When the tax of cigarettes was increased, the prices of cigarettes went up. This in turn had a direct impact on the consumption of impulse goods such as chocolates, magazines, soft drinks and newspapers since consumers had to cut back on consumption of this impulse items so that they could still leave enough money to buy the same amount of cigarettes they were purchasing.
This means that as the prices of the cigarettes continue to rise, the demand for the impulse product will shift to the left from Do to D1 as shown in the diagram below. Source: Kim (2010) Q2. Do you believe that smokers will bear the whole tobacco tax burden? Using diagram(s) illustrate and explainEconomics states that when the price of a good or service goes up, then eventually, the demanded quantity of that commodity will go down.
However, in the recent past, researchers have suggested that due to the addictive nature of tobacco, this rule is exceptional to cigarettes. They argue that smokers will pay any amount of money so as to continue enjoying smoking the same number of cigarettes they used to so as to satisfy their wants and needs. It is worth noting that through increasing the tobacco tax, it will only act as a great incentive to the smokers to try and get cheaper cigarettes through patronizing shops offering lower prices, purchase cigarettes from the states which are neighbouring them and have lower tobacco tax, switching to other cheaper cigarette brands and buying tax free cigarettes over the internet.
Smokers will be forced to avoid tax which will involve them preferring to legally buy these cigarettes from duty free shops. For example, smokers who are in high taxing countries may engage legally in shopping across the border in neighbouring countries which have lower taxes.
They may also buy these cigarettes from native reservation where taxes don’t apply. Selling of tax free cigarettes will make the cigarettes more available for consumption for the Australian smokers. The smokers may also opt to evade tax (Tax evasion) where they will deliberately conceal to the tax authorities their true economic activities so as to minimize their liability of tax. For instance, the importers of tobacco will evade the custom duties while the manufacturers of tobacco will evade taxes on domestic consumption through under invoicing which will reduce the tax base.
Tax evasion will involve illicit production as well as illicit trade (smuggling). It is therefore clear that although consumption of cigarettes will be affected by increase in taxes, smokers will still look for other ways out to keep consuming this product. This is as shown in the diagram below.