Supply And Demand Model Case Study

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Figure 4.1 – Influence of the tax on the price of cigarettes
Figure 4.1 illustrates the rising of the price as a result of the increasing tax. Market equilibrium moves from the point E0 to the E1. At this level of price, quantity reduces from Q0 to Q1. Price grows from P0 to P1. Consequently, the supply and demand model illustrates, that imposing a higher tax helps to reduce sales of cigarettes.
Taxes burden affects more that category of the market which has a less price elasticity. That’s why it is important to study whether cigarettes demand is elastic or not. Price elasticity assumes the demand falls to the greater percentage than the price rise.
As a survey illustrates, in 2010 there were 44.1% of Australians saying that the rising of
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It is illegal to supply particular products at a lower level. Diagram 4.2 – Price floor
Diagram 4.2 shows the effect of a price floor. It stimulates price to shift from the level Pe to Pf. As a result, the quantity demanded and supplied differs. Tobacco companies can sell more, but smokers can buy less at the new price level. This moves the market out of equilibrium (Mankiw, 2012: 116-117).
It is also necessary to say, that price floor has more significant effect on reducing the demand in a case with the price elastic good. The demand for cigarettes tends to be price inelastic. This mean, price floor will not reduce the willingness to buy tobacco products significantly. There also can appear a problem of an illicit market.
To compare a price floor and a tax, the last one is more effective. A tax policy brings additional earnings from the increasing price to the government, while a price floor policy not. This means a deadweight loss will be less with a tax.
The main objective for the government in all countries should be the health and the wealth of their people. Caring out the reduction of smokers is an important step to prevent diseases among the population. Initiating of an increase of the tax rate on cigarettes is a rather effective way to stimulate some categories of people to refuse from
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First of all, it leads to the increasing of price on cigarettes. This stimulates price sensitive smokers to decrease the consumption significantly more. Secondly, it cuts the motivation of consumers to substitute more expensive brand for cheaper ones. This will influence more poor and youth as their budgets are rather limited.
High prices also prevent new smokers appear (International Agency for Research on Cancer, 2011). It will be more costly to buy cigarettes and people, especially young one, will refuse to start smoking.
It is also important to understand, different public choices and the degree of health awareness can also influence the effectiveness of tax policy. That’s why taxation should not be the single instrument for restriction of the cigarettes consumption. Different social campaigns should help to achieve a higher level of the reduction of the number of smokers.
To sum up, I’d like to highlight the main points I have investigated with this essay:
• Taxes increase the price of cigarettes and reduce the consumption;
• Taxes burden falls more on the price inelastic category of the market;
• Cigarettes demand is a rather price inelastic;
• At the same time quite big percentage of Australians mentioned that rising prices have affected their smoking

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