Narrbegin Exhibit 5.4 Supply and demand curves for cigarettes
-As shown in Exhibit 5.4, assume the government places a $1 per pack sales tax on cigarettes. The percentage of the burden of taxation paid by consumers of a pack of cigarettes is:
A) zero.
B) 25 per cent.
C) 50 per cent.
D) 100 per cent.

Question

Narrbegin Exhibit 5.4 Supply and demand curves for cigarettes  
-As shown in Exhibit 5.4, assume the government places a $1 per pack sales tax on cigarettes. The percentage of the burden of taxation paid by consumers of a pack of cigarettes is:
A) zero. 
B) 25 per cent. 
C) 50 per cent. 
D) 100 per cent.

Quizplus · Accepted Answer

When a sales tax is placed on cigarettes, the supply curve shifts upward by the amount of the tax (in this case, $1 per pack). This results in a new equilibrium point on the demand curve where the price paid by consumers increases and the quantity traded decreases. The burden of the tax is shared between consumers and producers, but the percentage paid by consumers depends on their price elasticity of demand. In this case, the demand curve is relatively steep, indicating that consumers are relatively unresponsive to price changes. Therefore, consumers end up paying a larger percentage of the tax burden, approximately 50%.