New York City has the highest cigarette taxes in the country. During the four months following the recent tax hike, sales of taxed cigarettes in the city fell by more than 50 percent as consumers turned to the city's bustling black market. The thriving illegal market for cigarettes has diverted billions of dollars from legitimate businesses and governments to criminals.
a. How has the market for cigarettes in New York City responded to the high cigarette taxes?
b. How does the emergence of a black market impact the elasticity of demand in a legal market?
c. Why might an increase in the tax rate actually cause a decrease in the tax revenue?