Economics: Excise Tax, Elasticity, and Local Government Mergers

This economics assignment provides a detailed analysis of two key areas. First, it examines the impact of excise taxes on tobacco products, utilizing a supply and demand framework to illustrate how the tax burden is distributed between consumers and producers, emphasizing the role of price elasticity of demand. The analysis shows that due to the inelastic nature of tobacco demand, consumers bear a larger portion of the tax burden. Second, the assignment explores the economic rationale behind the merger of local government councils in Australia, focusing on the potential for economies of scale, reduced fixed costs, and improved operational efficiency. The assignment argues that mergers can lead to lower long-run average costs and enhanced service delivery, ultimately benefiting both the government and citizens. Desklib offers a wealth of similar solved assignments and past papers to support student learning.

Running head: ECONOMICS ASSIGNMENT
Economics assignment
Name of the student:
Name of the University:
Author note

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Table of Contents
Answer 1:...................................................................................................................................2
Answer 2:...................................................................................................................................4
Reference:..................................................................................................................................8

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P
P1
P2
S2
S1
D0
Q2 Q1 Q
Answer 1:
Considering the government’s announcement back in 2016 regarding the tax rate
increase on the cigarette and data from the Australian taxation office, it can be stated that
prevailing tax rate as on 1st of January 2018 on the standard 20 packet of cigarettes is 12.5%
(Excise rates for tobacco, 2018).
If the price of a standard 20 packet cigarette is considered to be $30 post taxation,
then the pre-tax price would be 26.67$.
Now, as the tax on the cigarette has been imposed it was aimed to reduce the
consumption of the same at a large scale, however, whether it achieved its desired target or
not, that need to be checked out. In order to do the same, it would be beneficial to describe
the tobacco taxation effect though utilising the supply and demand framework.
Figure 1: Demand and supply framework of tobacco market
Source: (Created by Author)
From the figure 1, the demand and supply framework of the tobacco market can be
seen and in spite of the fact that demand and supply model is a simple economic framework,

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it can easily determine the price and quantity demanded of the product (Ruttan & Thirtle
2014). Not only can this, in addition to it, supply and demand model explain the factors that
cause change in the price and the demand of the same. Moving forward, from figure 1, it can
be seen that the demand is represented by the D1 and the initial supply is represented through
the S1. Quantity demanded has been represented in the horizontal axis and the price of the
tobacco product has been showcased in the vertical axis (Li, Chen & Dahleh, 2015). Now at
the initial equilibrium price is P1 and the demand is Q1 as, at this point the supply of the
tobacco equates with the demand of the same.
Considering the fact that, government has imposed excise duty, then it is ought to
reduce the supply of the tobacco products and from the figure 1, this phenomenon can be
represented through the upward shift of the supply curve (Canto, Joines & Laffer 2014). Post
taxation, supply curve has moved upward to a new position S2 and at the place where it cuts
the demand curve, equilibrium will be determined there. At the new equilibrium, price is P2
and the quantity demanded is Q2 (Zoutman, Gavrilova & Hopland, 2018).
From the figure 1, it can also be perceived that the tax burden of tobacco largely lies
on the consumer. Tobacco being a luxury product, have low elasticity (Boadway & Song,
2016). From the figure 1, it can be seen that the demand curve is highly inelastic and exhibits
that with change in the price, there will be little amount of alteration in the demand. As the
price rises, there will be lower amount of change in the demand and it provides the producer
free hand to shift the tax burden to the consumers (Tarantilis et al., 2015). From the figure 1,
it can be seen that the yellow coloured zone represents the consumer burden and the green
coloured zone is the tax burden of the producer, whereas, due to the imposition of tax, there
will be a certain amount of deadweight loss that has been highlighted by the red coloured
zone in the diagram. Comparing the tax burden of the producer and consumer, it can be seen

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that the most of the burden has been faced by the consumer due to the fact that that tobacco is
luxury good and it highly inelastic to price change.
When it comes to the price elasticity of demand then it represents the change in
quantity demanded with the change in the price (Friedman, 2017). If the price elasticity of
demand of a product is relatively low, then it can be said that the change in demand is low
compared to the change in price, which can be seen in the case of the luxury product.
Tobacco being the luxury product showcase inelastic demand that represents the price change
will be higher compared to the change in demand (Johnson, 2017). Considering the own price
elasticity, it can be seen that the percentage change in quantity demanded of tobacco is lower
than the percentage change in price of the same that allows the producer to shift the burden of
the tax from itself to the producer.
Answer 2:
According to the latest proposal from the state governments around Australia, it
would be better to merge the local government councils and the rationale behind this is under
critical consideration since then. Though the main factor of this lies within the huge cost
incurred by the council to maintain its working framework, however, it needs detailed
analysis. According to the Zeedan, (2017), margining the local government is meant to
enhance the economies of scale of the authority and in addition to this it is aimed to enhance
the functional capabilities of the local authorities. Though in brief, however essential details
regarding the rationale of this unification is mentioned below:
Lowering the fixed cost:
As mentioned earlier, lowering the fixed cost is one of the major reason for the
merger of the local authorities. Levy, (2015) has argued that, local authorities of the
Australian government need huge amount of money as their fixed cost. Most of the cost goes
in maintain the building and the other things in good condition that cause a loss to the

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national income. Thus, with the merger of the local authorities, it can be expected that the
fixed cost, which is the higher amount of cost within every stipulated time by the local
authorities, will be reduced. As the figure 2 highlights, in addition to this, as the fixed cost
lowers, it will reduce the average variable cost too due to the optimal resource allocation
(Boardman et al., 2017). It will help both the local and the central government to save huge
amount of cost of operation.
Figure 2: Average fixed cost
Source: (Du et al., 2014)
Reducing the long-run average cost curve:
Long run average cost is the representation of the performance of a business. From
figure 2 it can be seen that, as the economy moves, long run average cost starts to reduce and
the economy moves towards the increasing returns to scale. Considering the case of the
merger of the local authorities of the Australia, it can be said that as the firm merge, it will
lower the cost of operation and thrive forward the combined agency to have economies of

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scale (Atack, 2018). It will further reduce the cost of operation and help it to attain efficiency
in performance.
Figure 3: Long run average total cost
Source: (Du et al., 2014)
Achieving higher operational power:
Though it is evident that cost of operation is one of the main reason for the proposed merger,
however, according Petersen & Kumar, (2015), besides the operational cost factor there is
operation factor too, that has driven the notion of merger to come up. With all the
governmental local agencies under one roof, it will be better for the customers as well as
service providers to provide better service within a short period of time (Dinan, 2017). It will
further help the agency to aid the customers with higher efficiency, which is another aim of
this merger.

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Considering these facts, it can be said that merger is certainly good move by the local
authorities. It will reduce the price of operation, enhance the serviceability and the efficiency
of the organisation that will further reduce the price of operation. Thus to conclude it can be
stated that the rational lies behind the economies of scale and the operational parameters.

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Reference:
Atack, J. (2018). Estimation of economies of scale in nineteenth century United States
manufacturing (Vol. 5). Routledge.
Boadway, R., & Song, Z. (2016). Indirect taxes for redistribution: Should necessity goods be
favored?. Research in Economics, 70(1), 64-88.
Boardman, A. E., Greenberg, D. H., Vining, A. R., & Weimer, D. L. (2017). Cost-benefit
analysis: concepts and practice. Cambridge University Press.
Canto, V. A., Joines, D. H., & Laffer, A. B. (2014). Foundations of supply-side economics:
Theory and evidence. Academic Press.
Dinan, T. M. (2017). Economic Efficiency Effects of Alternative Policies for Reducing
Waste Disposal 1. In The Economics of Residential Solid Waste Management (pp.
65-79). Routledge.
Du, Juan, Wade D. Cook, Liang Liang, and Joe Zhu. "Fixed cost and resource allocation
based on DEA cross-efficiency." European Journal of Operational Research 235, no.
1 (2014): 206-214.
Excise rates for tobacco. (2018). Ato.gov.au. Retrieved 21 April 2018, from
https://www.ato.gov.au/Business/Excise-and-excise-equivalent-goods/Tobacco-
excise/Excise-rates-for-tobacco/
Friedman, M. (2017). Price theory. Routledge.
Johnson, H. G. (2017). Macroeconomics and monetary theory. Routledge.
Levy, A. (2015). Advancing Local E-government Through Town-gown Collaboration in the
Web 2.0 Environment: A Comparative Case Study of Six Small Municipalities in
Pennsylvania.
Li, N., Chen, L., & Dahleh, M. A. (2015). Demand response using linear supply function
bidding. IEEE Transactions on Smart Grid, 6(4), 1827-1838.

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Petersen, J. A., & Kumar, V. (2015). Perceived risk, product returns, and optimal resource
allocation: evidence from a field experiment. Journal of Marketing Research, 52(2),
268-285.
Ruttan, V., & Thirtle, C. (2014). The role of demand and supply in the generation and
diffusion of technical change(Vol. 21). Routledge.
Tarantilis, F., Athanasakis, K., Zavras, D., Vozikis, A., & Kyriopoulos, I. (2015). Estimates
of price and income elasticity in Greece. Greek debt crisis transforming cigarettes into
a luxury good: an econometric approach. BMJ open, 5(1), e004748.
Zeedan, R. (2017). Bigger but not always better: Size and democracy in Israeli amalgamated
local governments. Journal of Urban Affairs, 39(5), 711-728.
Zoutman, F. T., Gavrilova, E., & Hopland, A. O. (2018). Estimating Both Supply and
Demand Elasticities Using Variation in a Single Tax Rate. Econometrica, 86(2), 763-
771.