Economics 100 Assignment Table of Contents Article Summary: 2 Introduction: 2 Analysis: 3 Conclusion: 8 References 9 Article Summary: The article “Illicit Smokes up 25% since tax rise” by Eli Greenblat talks about the effects of increase taxes on the illegal trade and smuggling of cigarettes in Australia…
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It was concerned about the health issues that this can pose to the health of its population and the working class. In order to counter the problem, it was decided to increase the tax rate on cigarettes in order to make sure that less people smoke. The government was also aware of affinity that consumers have towards certain brands and some will never smoke if their brand is not available. In order to deter people it decided to legislate for the plain packaging of cigarettes. However, the rise in cigarette taxes did not reduce the consumption of cigarettes, but instead resulted in illicit trading of cigarettes and several black markets for trading of cigarettes popped up. (Hunt 2011) Since we can see that the Australian government has used several strategies to discourage the use of cigarettes, we are going to test these strategies from economic point of view using various economic theories and diagrams. This report will examine several issues such as what happens to the market when the tax is introduced and what happens when a tax is levied on a highly inelastic good like cigarettes. The effects of imposition of a tariff on a good are going to be analyzed, in order to see why the imposition of taxes increased smuggling of cigarettes in Australia. ...
Imposition of taxes on cigarettes would make cigarettes more expensive. This means that less people would demand it now as a general rule higher the price, lower is the demand. This can be represented in the following diagram: It can be clearly seen in the diagram, how tax reduces the quantity demanded and supplied in the market and how the price of a good increases after the imposition of a tax. This means that the consumers will now have to pay more for a pack of cigarette. This would reduce their willingness and ability to buy cigarettes and the new equilibrium will form at Q with tax where the quantity demand and quantity supplied in the market is less than when there were less taxes. This was what the Australian government tried to do. They tried to reduce the consumption of cigarettes by making them more expensive by levying a tax on them. (Chrystal and Lipsey 2004) Elasticity: This could have been a successful way to discourage the use of a product had the product not been a cigarette. As cigarette is an addictive product the demand for this product is price inelastic. Consumers don’t look at the price of product, but instead keep demanding the same amount of product as they were when the prices were less. This meant that the strategy devised by the Australian government to discourage the use of cigarettes was not effective because the good they were targeting was a good with an inelastic demand. This situation can be represented by the following demand and supply diagram: Since cigarettes have an inelastic demand, the slope of the demand curve is very steep. As a result any increase in price due to taxation won’t affect the quantity of cigarettes traded in the market. As we can see in the above diagram that a large increase
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