Answer to Question #163751 in Macroeconomics for Anushka Negi

Question

The government of Selgina is serious about drugs. Possession of drugs is illegal and is severely penalized. However, a black market exists which the government has failed to dismantle despite serious attempts. Khusenichho Chamling, the health minister, is worried about the situation. In early 2019, a consultant working with health ministry suggested that the government should increase the price of a pack of cigarettes from 200 Selgina dollars ($) to $600. A survey conducted in December 2019 suggested that over the year, the quantity demanded of marijuana decreased from 2,000 kgs per day to just 800 kgs. Calculate the cross elasticity of demand and tell why the policy has proved so effective.                                    

Answer 1

Cross price elasticity of demand

$=$change in quantity of one good $/$ $\%$ change in price of other $=\frac{-60\%}{200\%}=-0.3$

Cross price elasticity of demand is -0.3.

This means that the marijuana and cigarettes were complementary goods as the cross price elasticity came out to be negative.

This was effective was the government raised the price of cigarettes . The quantity demanded for cigarettes will fall because of law of demand. Marijuana was complementary to cigarettes. Hence its demand will also fall. The government could control two addictive things by just one tool here. Hence this policy was effective.