What trade-offs must policy makers make

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Reference no: EM132200203

Question: Please help in answering the question below:

In devising taxes, there is often a debate about (i) who bears the burden of the tax and

(ii) whether the tax achieves some desirable social goal, such as discouraging undesirable behavior by making it more expensive. In the case of cigarettes, smokers tend to be highly addicted and have lower income than the average nonsmoker. Taxes on cigarettes have historically had the effect of raising the price to consumers almost one for one with the size of the tax.

a) Why might such a tax be undesirable when considering issues of tax equity- that is, whether or not the tax burden falls more heavily on lower-income people? How do the price elasticities of supply and demand for cigarettes affect the equity of cigarette taxation?

b) How do the price elasticities of supply and demand for cigarettes affect the effectiveness of the tax in discouraging smoking?

c) In light of your answers to parts a. and b. and the historical response of price to the tax, what trade-offs must policy makers make when considering a cigarette tax?

Reference no: EM132200203

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