The Economics of Cigarette Taxes

            Today, the cigarette tax is varying in different localities. Some state set 1.51dollars per pack, another state set only 12cents per pack. However, the federal tax on cigarettes is 39cents per pack. Now, the national trend in cigarette taxes is getting higher because smokers have more health problems than nonsmokers and so incur greater medical costs than nonsmokers. Furthermore, it can help people to stop smoking if government set the highest taxes.

In this case, when government set higher taxes on cigarettes, people have to think whether the tax is imposed on producer or consumer. If there is no tax, the demand curve is D1 and the supply curve is S1. If the tax is imposed on producer, the supply curve shifts to the left from S1 to S2 and it is affected by the tax (RM0.50). So, the equilibrium quantity is Q2 and the price paid by consumer is P2. However, the price received by producer is P2 – RM0.50 because producer has to pay RM0.50 for tax. If the tax is imposed on buyer, the demand curve shifts to the left from D1 to D2 and it is affected by the tax (RM0.50). The equilibrium quantity is Q2 and the price paid by consumer is P2. However, the price received by producer is P2 – RM0.50 because consumer has to pay the tax. Those are definitely same between left shift in the supply curve and left shift in the demand curve. One major difference is that if the tax is imposed on producer, the supply curve will be affected and if the tax is imposed on consumer, the demand curve will be affected. The reason why it is same is buyers and sellers can share the burden of the tax.

 

 



 

           The supply of cigarette will be decreased when the price is increased. This is because, many people do not want to buy cigarette when the price is increased as some of them receives low income. Those who receive low income will have to think twice before purchasing the cigarettes. However, consumers who do not face any financial problems will be able to purchase cigarettes. On the other hand, the demand of cigarette will be increased when the price is decreased because the barrier to entry will fall. In this case, the supply curve does not shift but it moves along the curve because when the price changes, it does not affect a shift in the supply curve. However, the demand curve will shift to the left because the price will be increased, at the same time, the consumption will be decreased. However, the demand of cigarettes is inelastic, as the cost of cigarettes will be increased drastically, oppositely the consumption will be decreased.

 

 

 

           Equilibrium will be changed from E1 to E2 when the price increases because the demand curve will shift to the left. When the price increase and the supply decrease, the equilibrium will be affected. Basically, when the supply or demand curve shift, the equilibrium will be changed. It means that, if the equilibrium changed, the maximized profit will be changed as well. Equilibrium is the condition that, once achieved, tends to persist. It occurs when the quantity demanded of a commodity equals the quantity supplied and the market clears. For example, if the price of woods increases, the equilibrium will be changed because it affects to both supply and demand curves.

 

           In conclusion, when the government charges more taxes on cigarette, the consumption will only have a slight decrease. The number of nonsmoker will be increased which means that the people do not need to spend their money for medical check-ups regularly. On the other hand, if the number of nonsmoker increased, the government revenue will be reduced.