This question relates to the section Linkages Between Markets found on the www.myEconLab (www.myeconlab. com). In 1994, the Quebec and Ontario governments significantly reduced their excise taxes on cigarettes, but Manitoba and Saskatchewan left theirs in place. This led to cigarette smuggling between provinces that linked the provincial markets.
a. Draw a simple demand-and-supply diagram for the "Eastern" market and a separate one for the "Western" market.
b. Suppose that cigarette taxes are reduced in the eastern market. Show the immediate effects.
c. Now suppose that the supply of cigarettes is (illegally) mobile. Explain and show what happens.
d. What limits the extent of smuggling that will take place in this situation?