Question

What is the effect of cigarette taxes (and smuggling) on the consumption of alcohol? What does that imply about the cross elasticity of demand between the two?

Answer 1

Cross price elasticity of demand is the relationship between two type of goods that whether they are complements or substitutes to each other

Substitutes are those goods which can replace each other

for example tea and coffee

compliments are those goods which complete each other

for example bread and butter

here cigarettes and alcohol are complements in nature so when any taxes is applied by the government on cigarette then consumption of alcohol will also get down and opposite to it happens in smuggling

In smuggling there is a black market of cigarette transaction

this will cause the rise consumption of alcohol as well