Analysis of the Impact of a Proposed Cigarette Tax on Market Equilibrium and Economic Outcomes

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Analysis of the Impact of a Proposed Cigarette Tax on Market Equilibrium and Economic Outcomes A country that does not currently tax cigarettes is considering the introduction of a $0.40 per pack tax. The economic advisors to the country estimate the supply and demand curves for cigarettes as: Qa = 140,000-25,000P-----------------1 Qs =20,000+75,000P-----------------2 where Q= daily sales in packs of cigarettes and P = price per pack. The country has hired you to provide the following information regarding the cigarette market and the proposed tax: a) What are the equilibrium price and quantity with no tax? Equate the 1 and 2 above. P=1.20 and Q=110,000 b) What price and quantity would prevail after the imposition of the tax? After tax, Qd =140,000-25,000P----—--------—--3 Qs =20,000+75,000(P-0.40)--------—4 Solve 3 and 4,we get P=1.50, Q = 102,500 ¢). What portion of the tax would be borne by buyers and sellers, respectively? Since the initial equilibrium price was 1.20, The $0.30 is borne by consumers and I~ StudyXY
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