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Tax on Tobacco

Autor:   •  April 14, 2011  •  Essay  •  631 Words (3 Pages)  •  1,168 Views

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The price elasticity of demand refers to the measures of change in the quantity demanded relative to a change in price. The number price elasticity of demand indicates how sensitive demand is to price and it is always negative as when price increase the quantity demanded will always decrease. The way to notify whether the goods are elastic or inelastic, it depends on the number calculated by the formula but ignoring the sigh of the number, it the number is smaller than 1, then the product is inelastic, if it is equal to 1, it is perfect in elastic, once it is greater than 1, then it is elastic. Producers and governments always use the price elasticity of demand to make decisions of different products, if the product is inelastic, then a change in price will not lead much changes in quantity demanded, once it is elastic, even a small change in price will cause a big change in quantity demanded.

Tobacco is a kind of demerit good, which means that the product will be worse to the consumers more than the consumers, can acknowledge, and demerit goods will cause negative externality which will cause market failure. The consumption of tobacco creates external costs so that the social cost exceeds private cost, and the diagram below illustrates the market failure caused by tobacco. A lack of information makes the demand curve shift to the right and increase the demand for the product from Q3 to Q1. Therefore, on the view of governments, they always seek to reduce the consumption of demerit goods and intervene in the market.

Taxation is always used to raise revenue to finance government spending or to influence firms' and households' behaviour, and obviously, a tax on tobacco is used to influence firms' and households' behaviour to make it more expensive and change the consumption patterns of it. There are two kinds of taxes which include direct taxes and indirect taxes, the tax added on tobacco


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