Federal Taxation

The federal taxation of a good and price controls imposed by governments have their effects in the economy. As to how possible are these effects will be described and discussed using two articles on cigarettes by answering the following given questions: Is the tax levied on the producers or consumers? How does the tax affect supply and demand? How does the tax affect the equilibrium price and quantity? In this market describe a hypothetical situation where a price ceiling or floor could be imposed. What implications would this have for the market?

The article entitled “The effect of raising state and federal tobacco taxes – tobacco consumption” by Bourne et. al (2004) discusses the effect of the increase in tax on cigarette consumption by increasing the cost of the product. Increasing the production cost the product will cause the producer of the said product to increase the selling price. Hence the authors explained that the demand curve is downward sloping which indicates a decrease or decline in the quantity purchased by consumers because of increase in the prices of goods.

Bourne et. al (2004) (citing US Department of Health and Human Services, 1992) confirm the application of the economic principle on the sale of cigarettes where they found that higher the price of a package of cigarettes product would cause fewer package to be sold. Given now the increase price of cigarettes caused by imposition of tax, it may be asked: Is the tax levied on the producers or consumers? As to whether the tax is levied on the producers or consumers will depend on the inelasticity of the supply and demand.

If the producer will produce the same quantity of cigarettes regardless of the increase in the price, he is called inelastic, for which reason it may be inferred that the tax is levied on him. This is of course with the added condition that the customer is elastic that is he reacts sensitively to the change in price by decreasing his quantity purchased so that even a slight increase in price would lead such consumer to have a large drop in the quantity demanded.

On the other hand, if the consumer will demand the same quantity regardless of the change in price, he is considered inelastic, for which reason it may be inferred that the tax is levied on him This is of course with the condition that the producer is very sensitive to the price change by being able to change quantity supplied so that even a small decrease in price will cause him to cause a large drop from quantity produced.

As to which of them bear the tax on cigarettes, it may be inferred that it is the consumer. This is based on the result a research where it was found that higher prices of cigarettes caused by imposing tax is an effective on discouraging the youth from going into a higher level of cigarette intensity (Liang and Chaloupka, 2002).