Question

Cigarette smokers are very loyal buyers of cigarettes. Even if prices of cigarettes rise, they will typically continue to buy the same quantities as before. Therefore, a new tax on cigarettes will be paid by Select the correct answer below:
a. mostly cigarette buyers.
b. mostly cigarette sellers.
c. both buyers and sellers equally.
d. the government.

Answer 1

Answer:

a. mostly cigarette buyers.

Explanation:

The law of demand states an inverse relationship between quantity demanded of a good and it's price, keeping other factors affecting demand as constant.

Price elasticity of demand refers to the degree of responsiveness of quantity demanded to a change in price.

Alcohol and cigarettes are exceptions to the law of demand since in their case, the factor of addiction presides which outweighs rational decision making.

Thus, price elasticity of demand of cigarettes is inelastic. So a marginally higher price charged for cigarettes will not reduce their consumption.

A new tax on cigarettes would raise their prices. The manufacturers, to cover such taxes and maintain the same margin as before would further raise the prices of cigarettes further.

Thus, the tax burden would be shifted to the consumers and hence majorly borne by them.