Question

Select any market for a product that you are familiar with. Assume that a tax is applied to that product. What impact do you think it would have on the supply and demand model of the market? Would a tax on this product tend to generate revenue, change behavior, or a mix of both? Why do you think that? Identify any issues you might encounter with implementing a tax such as this, from political, geographical and social justice perspectives.

Answer 1

Considering a tax on consumption of cigarettes. This will reduce the demand for cigarettes. As a result the demand will shift to the left while supply stays same as before. This tax will generate a tax revenue, it will also involve a change in behaviour such that now people demand less cigarettes in new equilibrium as compared to that before thw tax. This happens because tax increases the price that consumers pay, increase in price reduces the demand, given cigarettes are not necessary goods. There could be political issues in that the producers of tobacco and geographical issues in that the tobacco growing areas may loose. And thus the tax must be imposed after taking into consideration all these effects,