onsider the following market supply and demand information for cigarettes: Price ($) Demand for Cigarettes (in million packs per week) $2 12 3 10 4 8 5 6 6 4 7 2 and the supply is 8,000,000 cigarette packs per week. Now suppose that the government mandates a $1 excise tax per pack on the buyers of cigarettes. Who bears the economic incidence (tax burden) of the excise tax? Explain why this is so. How would your conclusion be different if the supply of cigarettes is not perfectly inelastic? How much tax revenue is collected by the government? Would you say that in this example the excise tax on cigarettes is efficient in raising revenues for the government? Explain.
Consider the following market
Price ($) Demand for Cigarettes (in million packs per week)
$2 12
3 10
4 8
5 6
6 4
7 2
and the supply is 8,000,000 cigarette packs per week.
Now suppose that the government mandates a $1 excise tax per pack on the buyers of cigarettes.
- Who bears the economic incidence (tax burden) of the excise tax? Explain why this is so. How would your conclusion be different if the supply of cigarettes is not perfectly inelastic?
- How much tax revenue is collected by the government? Would you say that in this example the excise tax on cigarettes is efficient in raising revenues for the government? Explain.
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