Price Elasticity of Demand for Tobacco & Taxation Assignment

Added on - 19 Nov 2019

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Exercise 1: Price Elasticity of Demand for Tobacco & TaxationMost studies find that younger people are more sensitive than older people to increases in the price ofcigarettes. The averageprice elasticityof cigarettes for teenagers is –1.43, –0.76 for young adults,and –0.32 for adults. Another factor influencing elasticity is income with studies in high-incomecountries finding greater price sensitivity of tobacco among those on lower incomes.a)There will not be much impact on government revenue. This is because there is a negativerelationship between price and the quantity demanded hence, the tax will have a less thansignificant effect on tax revenue.b)First, teenagers might be on the experimenting phase of using the cigarettes and thereforeas price increases may reduce their interest in the cigarettes as they might seekalternatives. The older individuals have already formed a habit of smoking.c)Lower income groups may look at the effect of the price increase in making otherdiscretionary purchase, therefore if there is a significant increase, they may opt out.d)Increase in the taxes of the price of cigarettes increases the budgetary allocation for thetobacco for the consumers.e)The impact of levying the tax may increase the supply due to expectations of priceincrease. This may therefore reduce the equilibrium price due to a maintenance of thedemand for cigarettes.f)The levying of taxes may decrease the welfare of individuals especially since it may affecttheir home budgets related to other discretionary purchases.g)Yes, this is because there is need to assess the impact of levying taxes not only on theindividual’s health but also impact on budget.h)The rollies may decrease the demand for cigarettes which may further reduce the equilibrium price.
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