Question

Logically discuss the impact of the implementation of health tax on cigarettes on the consumers and producers.

Answer 1

Answer:

Explanation:

Impact of health Tax

On Producer Side

When the government imposes tax on output of a firm it increases firm's marginal cost by the amount of the tax. In return the firm will reduce output to the point at which the marginal cost plus the tax equals. Sales tax shifts supply curve inward.

When the Govt. implemented the health tax the output of the firm reduced to maintain as there is an effect on demand side too. As shown in the figure that the output level is reduced from 01 to Q2

On Consumer Side

When the govt increases or implements the tax on goods, these taxes influence the consumer behavior. The immediate effect is the price level of the goods increased so the demand for

goods reduced because it reduces the buying power of the consumer so consumer buy less p with these prices.

Answer 2

The economic impacts of health tax in the cigarette market depends on whether the tax is imposed on consumers or producers.

Explanation:

• A health tax imposed on the producers or sellers of cigarettes would reasonably lead to an increase in the total or/and marginal cost of production of cigarettes for the sellers or producers, depending on the particular method of tax implementation.

• As a result of an increase in the production cost, the cigarettes supply will decrease in the market as the considering that the market price of cigarettes and the revenue level are unchanged, the per unit or the overall production cost of cigarettes has gone up which will affect the profit level of the sellers or producers. Hence, the sellers or producers would maximize their overall or total profit on a lower of output compared to pre-tax situation.
• As a result, of reduced supply of cigarettes due to health tax imposition on the sellers or producers, the equilibrium price of the cigarettes will increase and the equilibrium quantity of cigarettes in the market will decrease.
• On the other hand, if the burden of the health tax is passed on to the consumers, now they would have to pay a higher overall price for cigarettes which includes the regular or actual price of the cigarettes and an additional health tax imposed on consumption.
• As a result of the health tax, the demand for cigarettes will decrease among consumers or buyers leading to a decrease in both the equilibrium price and quantity of cigarettes in the market, considering everything else constant.