1) Because of the negative health consequences to smoking, governments are considering a number of different policies. For each of the policy options being considered below, draw a separate supply and demand diagram for the market for cigarettes. Be sure to consider the fact that cigarettes contain nicotine, which is highly addictive. Draw your diagrams large so that they are easier for me to read.

a) Health Canada media campaigns and product labelling requirements aimed at making the public aware of the dangers of cigarette smoking. Use a clear and accurately labelled supply and demand diagram to briefly explain the impact on market price, level of market activity and industry revenues. (5 marks)

b) An excise tax on cigarettes. Use a clear and accurately labelled supply and demand diagram to clearly illustrate the impact on the price paid by buyers, the price received by sellers and quantity. Compared to the market equilibrium, briefly explain what happens to industry net revenues (after paying the tax), what happens to consumers' expenditures? What happens to the level of market activity? Who bears the greatest burden of this tax? (5 marks)

c) Combine both policy options a) and b). Use a clear and accurately labelled supply and demand diagram to address the following questions: Compared to the original equilibrium without any intervention, briefly explain what happens to the level of market activity? What happens to the price faced by the consumers? and the price faced by the firms? What can you say about the industry revenues and consumer expenditures? Be

brief. (Hint: Draw your diagram by first applying the Health Canada policy and then applying the tax, in that order). (5 marks)