Cigarette smoking has been scientifically associated with debilitating lung diseases such as cancer and emphysema. Governments have tried to convince smokers to smoke less through a)
Cigarette smoking has been scientifically associated with debilitating lung diseases such as cancer and emphysema. Governments have tried to convince smokers to smoke less through a) warnings on packages; b) by imposing a large tax on cigarettes.
• The warnings lead some cigarette smokers to reduce their smoking habit and/or quit smoking altogether. This reduces the demand for cigarettes and can be shown graphically by a shift in the demand curve to the left.
• The tax on cigarettes has a price effect. It raises the price of cigarettes and results in a movement along the demand curve. The higher price will reduce of demand for cigarettes.
1. What happens to Consumer and Producer surplus in the first case with the fall in demand?
2. What happens to Consumer and Producer surplus in the second case with the tax?
3. Do you believe based on your analysis that the government policy of raising the price of cigarettes through higher taxes is a good policy? Why or why not?