Saturday, November 5, 2011

NYC smoking tax and revenue

http://today.msnbc.msn.com/id/45152017/ns/business-us_business/#.TrV1f1ZZhWo

This is an example of a tax that could be causing people to turn to alternative options such as roll your own cigarettes or out of state purchases to avoid paying the additional cost of the tax. since cigarettes are a vice and a relatively inelastic demand for the product exists, the tax can be pretty high before people will change behaviors (resulting in deadweight loss). The tax could be past a point where revenue is maximized on the laugher curv, this has been acceptable because the change in behavior of quitting smoking is an externality that has positive consequences on health of society. But if the tax is high enough where people are turning to alternatives that still allow them to smoke, but for cheaper, then the tax is not maximizing revenue and is also not resulting in the externality of health benefits as people are abandoning the habit all together.

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