Using information from the text/data and your knowledge of economics evaluate the policy of increasing the tax on cigarettes as a measure to reduce the negative externalities caused by smoking.

Informations)

Taxes on cigarettes

Lawmakers in the state of West Virginia in the United States are proposing an increase in the

state tax on cigarettes from US$. 55 to USS1 20 per pack

One justification for the increase in the cigarette tax is that cigarettes are a demerit good

Smoking can cause premature deaths, and it leads to negative externalities in the form of

additional health care costs and health hazards for non-smokers. It is estimated that the tax

increase may prevent 6600 smoking-related deaths, and stop 13 200 children from becoming

smokers. Some anti-smoking groups claim that increasing cigarette taxes is the most effective

smoking prevention measure

Other groups claim that the largest impact on smoking prevention is made by anti-smoking

advertising on television and by programmes to help smokers quit. Cigarettes tend to have a

lower price elasticity of demand(PED )than most other goods and services. Each 10 % increase

in the price of cigarettes results in a 6. 5% drop in youth smoking, a 2% drop in adult smoking,

and a 4% total drop. This means that the increase in the tax may not contribute significantly to

smoking prevention, although it does generate large increases in tax revenues for the government

It is expected that the proposed increase in the cigarette tax will more than double annual

cigarette tax revenues

Also, the effectiveness of the tax as a smoking prevention measure may be lessened by the

availability of cheaper cigarettes in states that are close to West Virginia that have lower

cigarette taxes, such as Kentucky

S It is further argued that indirect taxes such as those on cigarettes are regressive taxes,

and impact more strongly on lower income people. Since lower income people also tend to

smoke more, they are even more strongly hit by the cigarette tax