Analysis of the Impact of a Proposed Cigarette Tax on Market Equilibrium and Economic Outcomes

Examining the effects of cigarette tax on market balance and economy.

Charlotte Young

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AnalysisoftheImpactofaProposedCigaretteTaxonMarketEquilibriumandEconomicOutcomesAcountrythatdoesnotcurrentlytaxcigarettesisconsideringtheintroductionofa$0.40perpacktax.Theeconomicadvisorstothecountryestimatethesupplyanddemandcurvesforcigarettesas:Qa=140,000-25,000P-----------------1Qs=20,000+75,000P-----------------2whereQ=dailysalesinpacksofcigarettesandP=priceperpack.Thecountryhashiredyoutoprovidethefollowinginformationregardingthecigarettemarketandtheproposedtax:a)Whataretheequilibriumpriceandquantitywithnotax?Equatethe1and2above.P=1.20andQ=110,000b)Whatpriceandquantitywouldprevailaftertheimpositionofthetax?Aftertax,Qd=140,000-25,000P----—--------—--3Qs=20,000+75,000(P-0.40)--------—4Solve3and4,wegetP=1.50,Q=102,500¢).Whatportionofthetaxwouldbebornebybuyersandsellers,respectively?Sincetheinitialequilibriumpricewas1.20,The$0.30isbornebyconsumersandI~StudyXY

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