You are a policy advisor in the Ecuadorian government. The government would like to promote public health and raise more revenue by increasing cigarette taxes. The current average price (including any taxes) is $5.25 per pack (USD). The price elasticity of demand for cigarettes is -0.87. An estimated 150 million packs per year are currently sold.

a. If taxes are increased by $1.00 per pack, how many fewer packs will be sold?

b. How much tax revenue will be raised?

c. Calculate the deadweight loss associated with the tax.

d. Calculate the change in surplus associated with the above. (Graphs are required for this question.)

i. Consumer surplus

ii. Government surplus

iii. Social surplus

e. Based solely on the numbers in parts C&D, is society net better or worse off with this $1.00 tax?

f. As an astute CBA analyst and public health professional, you know that smoking incurs negative externalities (e.g., secondhand smoke). Externalities were not included in the simple elasticity report that you received from a market research firm. What is the minimum externality per pack if society is to be better off with the tax?

Answer rating: 100% (QA)

a The price elasticity of demand for cigarettes is 087 Therefore a 1 increase in price will lead to a 087 decrease in quantity demanded If taxes are increased by 100 per pack which is a 1905 increase ... View the full answer