Thursday, February 24, 2011

Cigarette Taxes

In 2009, the US government increased cigarette taxes at the federal level from $0.39 per pack to $1.01 per pack, which is an example of a per unit tax as presented in my Prin. of Microeconomics course. As a result of the tax, cigarette quit lines were receiving over three times the number of calls to quit, which is what the supply and demand model predicts with the tax - that prices will go up for consumers, and the amount of cigarettes consumed will decrease. In fact, the article expects a 9% drop in consumption due to the increase in the price, which indicates that cigarette consumers are price inelastic.

Additionally, notice that cigarette producers raised prices to cover the tax increase (but they did not raise prices by the full amount). Again, this would be expected when demand or supply is not perfectly inelastic, as shown in with the supply and demand model.

Finally, note at the bottom of the article the state and federal tax for cigarettes for each state.

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