Significant Increase In Government Revenue â€Myassignmenthelp.Com

Question: Discuss About The Significant Increase In Government Revenue? Answer: Introducation The imposition of tax on cigarette will reduce the demand for cigarette more than its price for teenagers. Hence, revenue will not increase much. For young adult and adult demand is inelastic. Therefore, for these groups demand reduces less than the price and lead to a significant increase in government revenue. The young adults tend to smoke less regularly than old adults do. Hence, adults have less elasticity. The dependency on tobacco is least for the teenagers making demand highly elastic. Low-income groups generally have high-income constraints. All of their income is mostly absorbed in meeting demand for necessary goods and left a few margin of income to spend on tobacco. This makes tobacco demand highly price sensitive. If the demand for low-income groups becomes inelastic then people belonging to these groups are unable to cut their consumption much with price increase for tax imposition. This can lead to shortage of funds for other necessary good in budget. Figure 1: Impact of levying tax on cigarette (Source: as created by the Author) With imposition of tax price paid by consumers increases from P* to P1 and this reduces consumer surplus from an earlier EP*G to a small triangle AP1 The price received by cigarette seller reduces from P* to P2. At the new price, producer surplus decreases from EP*F to BP2F. Total surplus is reduces and there is a deadweight loss imposed on society. Welfare analysis using only consumer and producer surplus covers the monetary value buyers and sellers impose on direct consumption and production of the good. However, for addictive items there are associated cost apart from price paid by the consumer. Therefore, a broader measure that incorporates such additional cost is needed. Figure 2: taxation in Rollies market (Source: as created by the Author) With a lower proportionate tax rate in rollies market, the price hike with taxation is smaller and thus burden on both the buyers and sellers will be less as compared to market in tailor made cigarette. The combined impact of rollies and tailor made cigarette should be considered to understand the overall impact of taxation. The loss in consumer and producer surplus is less in Rollies market than that in tailor market. The welfare cost or deadweight loss is also less here. Therefore, with more buyers switch to Rollies the welfare loss or the burden of taxation will be reduced. Advertising has a positive impact on demand. Advertising conveys information about product and prices to the consumers. With a ban on advertising consumer has less information and demand becomes less responsive. This makes demand curve steeper by increasing slope of the demand curve Advertising affects both consumers and producers. It affects producers by increasing competition. When competition increases, then seller has less market power. Now, with a ban on advertising competition among the existing and new companies reduced and this gives companies more power on price setting for tobacco product. Figure 3: Profit maximization with advertising ban (Source: As created by the Author) With a reduced competition, tobacco companies can chose a higher price and earn a greater profit. References Huang, J., Zheng, R., Chaloupka, F.J., Fong, G.T. and Jiang, Y., 2015. Differential responsiveness to cigarette price by education and income among adult urban Chinese smokers: findings from the ITC China Survey.Tobacco control,24(Suppl 3), pp.iii76-iii82. Resnick, M. and Albert, W., 2014. The impact of advertising location and user task on the emergence of banner ad blindness: An eye-tracking study.International Journal of Human-Computer Interaction,30(3), pp.206-219. Stiglitz, J.E. and Rosengard, J.K., 2015.Economics of the Public Sector: Fourth International Student Edition. WW Norton Company. Yao, T., Ong, M.K., Max, W., Keeler, C., Wang, Y., Yerger, V.B. and Sung, H.Y., 2017. Responsiveness to cigarette prices by different racial/ethnic groups of US adults.Tobacco control, pp.tobaccocontrol-2016.