Question 2

(a) Explain in words why the government will prefer to tax cigarettes than fruit juice. In your answer, discuss the implications on tax revenue and the deadweight loss.

[4 marks]

(b) Does the elasticity of demand affect whether the consumer or producer bears more of the cost of the tax? Explain using words and diagrams. Clearly label the consumer surplus, producer surplus, tax revenue, and the deadweight loss.

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