Answer to Question #190744 in Microeconomics for Ali hamza

Question

Suppose Government of Pakistan wants to put a curb on public smoking. Studies indicate that the price elasticity of demand for cigarettes is inelastic. If the government permanently increases the price of cigarettes, will the policy have a larger effect on smoking one year from now or five years from now?

Answer 1

In the short-term demand is inelastic, but over time, demand is more elastic

Tax evasion. A disadvantage of high tax is that it can encourage evasion. The high tax compared to European rivals creates an incentive for people to buy cigarettes on the black market. For example, cigarettes smuggled from the continent can be up to 50% cheaper. This means that the government loses tax revenues and doesn’t succeed in reducing demand.

If the government permanently increases the price of cigarettes substancially it may not have an impacy in the short run, however it will have an impact in the long run and people who cannot afford to smokw will quit smoking. Also due to higher prices less people will have an incentive to start smoking.