Answer to Question #228920 in Microeconomics for Cebo

Question

If the government wishes to make its population pursue a healthier lifestyle by creating a reduction in the demand for packets of cigarettes, examine and discuss how this can be implemented without government having to directly increase the price of a packet of cigarettes. Motivate your answer with a diagram.

Answer 1

Without directly increasing the price of cigarettes, the government can reduce its consumption by imposing a tax on cigarettes. 

This is explained with the help of the following diagram.

In the above diagram S and D represent the original supply and demand curves for cigarettes. E is the initial equilibrium, Y the initial quantity and P the price prevailing in the market.

Now suppose government imposes a tax 't' on cigarettes. As a result, market price of cigarettes rises to P1. P1 will be the price paid by the consumers. However, amount received by producers will be P2. This difference between P1 and P2 is the value of the tax. Now, due to the price rise, quantity of cigarettes demanded will fall to Y1.

Thus in this way the government is able to control the consumption of cigarettes without directly controlling its price.