The paper “ Economic Impact of Increasing Prices on Tobacco” is a pathetic example of the assignment on macro & microeconomics. A higher tax on cigarettes would mean that the cost of cigarettes would increase. This would make a certain section of the customer to either postpone their habit or to switch to some other cheaper mode like patches and gum. This will also translate into decreased sales of cigarettes for different reasons and an increase in the sale of other products. The effect of an increase in the tax of cigarette will look as follows The above chart shows that increase in the tax rate would increase the price of cigarettes which would increase the supply as suppliers will be willing to supply at a higher price but would lead towards a decrease in demand which would finally result in the quantity demand to fall. 2.
The tax will have an effect on the price elasticity of demand for cigarettes as a tax imposed would mean an increase in the price. If the tax is imposed on the supplier the supplier would look towards passing on the tax if not full partially to the customer.
This will automatically result in the prices to move up. As a result of this, the demand for cigarettes will fall. The effect this will have on the price elasticity also supports the same as an increase in prices reduces the demand which gets reflected through the price elasticity of demand which will be negative and confirm that the demand has decreased due to an increase in price. This is shown through the diagram below The above chart shows that an increase in the tax makes the suppliers pass on the burden of additional tax to the consumers who as a result will have to pay more.
This will have an effect as the consumers will be compensated as the suppliers won’ t be willing to supply at the same price and only when the price moves up and covers the additional tax which has been imposed will be willing to do so. This will make the consumer bear extra pressure and have to bear the additional increase in the prices through taxes. 3.
The price floor is the minimum price which has to be charged so that the suppliers are protected. This mechanism will work in this aspect as having a price floor that determines the minimum price the government can look towards reducing the consumption of cigarettes.
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