Answer to Question #157799 in Microeconomics for Jatin Anand

Question

Consider the market for cigarettes and assume that it is perfectly competitive. The demand curve in this market is perfectly inelastic ( choose a supply curve of your choice). The government imposes a tax of Rs 10 per quantity on the product. By how much will the price paid by consumers change? Will the quantity traded in the market change? What objective does this tax serve; does it increase or decrease social welfare in the market? Can a similar argument be made for petroleum products?

Answer 1

Since the tax is only a component, the price will rise by more than 10 rupees. The number of sellers in the market will decrease, larger sellers will remain, and small ones will leave the market.

 This tax is restrictive, that is, it has a positive social effect since it is aimed at combating bad habits, that is, at improving the quality of life.

If we draw an analogy and introduce such a tax on oil products, we will get a negative social effect, since this will lead to an increase in the cost of essential goods, therefore, will hit the poorest segments of the population hard.