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Excise tax rates on tobacco and tobacco products increase in March and September based on average weekly ordinary time earnings. Perform a web-search to determine the amount of excise tax charged (as...

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Excise tax rates on tobacco and tobacco products increase in March and September based on average weekly ordinary time earnings. Perform a web-search to determine the amount of excise tax charged (as at 1 January 2018) on a standard 20 packet of cigarettes. If the standard packet is sold for a price of $30, how much is the before tax price?

Illustrate using the demand and supply model, the effects of a tax imposed on sellers of tobacco products. Explain in detail who pays the tax (buyers and/or sellers) and discuss the role the price elasticity of demand plays in determining the impact on prices and quantity of tobacco products sold. Be explicit about any assumptions made in developing predictions.

Question 2a) Assume a perfectly competitive firm’s total cost (TC) for different levels of output Q is given by:

Q TC
0 50
1 100
2 140
3 170
4 190
5 210
6 230
7 260
8 300
9 350
10 410

In a table format for the range of output (Q) provided determine: average total costs, average fixed costs, average variable costs and marginal costs. At a price of $35 how many units will be produced in the short run? At this price how many units will be produced in the long run?


b) Explain the differences between a monopolistically competitive market and an oligopolistic market? Give examples of industries with these market structures to explain your answer.

Question 3

Some State Governments around Australia have pursued policies to merge Local Government Councils. Explain the economic rationale for these policies, use cost curves and related evidence to support your arguments.

Answered Same Day Apr 18, 2020

Solution

Soma answered on Apr 21 2020
137 Votes
Excise tax rates on tobacco and tobacco products increase in March and September based on average weekly ordinary time earnings. Perform a web-search to determine the amount of excise tax charged (as at 1 January 2018) on a standard 20 packet of cigarettes. If the standard packet is sold for a price of $30, how much is the before tax price?
Illustrate using the demand and supply model, the effects of a tax imposed on sellers of tobacco products. Explain in detail who pays the tax (buyers and/or sellers) and discuss the role the price elasticity of demand plays in determining the impact on prices and quantity of tobacco products sold. Be explicit about any assumptions made in developing predictions.
Federal government has imposed excise duty on cigarettes and excise equivalent duty on imported tobacco products for long. Cu
ently government has taken an aggressive move aiming to drastic reduction of tobacco products. The government has announced a 12.5% excise tax rate for every year for the next four years. This is one of the toughest tobacco plan in the advanced economies. A 12.5% tax rise for every year in tobacco products will result to raise the price of pack of cigarettes to A $40 by 2020. The price of cigarettes will be the highest in Australia in the world. According to pubic health experts, increasing the price of tobacco will be one of the most effective strategy to reduce the consumption of tobacco and tobacco related products. It is a wide perception that increase in the price of tobacco will led to decrease the consumption. This result is highly desired to protect public health in Australia. Now Australia has one of the highest price per cigarette pack- approximately $A22 per pack which is equivalent to US $17. If the standard packet is sold at a price of $30, then before the tax the price was $30- 12.5% of $30= $30- $3.75= 26.25 (Katherine T Hirono1, 2017)
Imposition and increase in excise tax on tobacco products is not new in Australia. Though the opposition part remains critical for the budget proposal, the tobacco tax plan has gained undivided support. In 2010, Australia has imposed a singular tax of 25% . Moreover, in 2013, the government has imposed 12.5% tax for every year 2013-2017. The cu
ent announcement of 2,5% tax every year is nothing but the continuation of long term plan. Due to strong policy intervention by government, the cost of cigarettes has increased at a much higher rate compare to any other commodity in Australia. Estimated study reveals that the cost of tobacco has increased by 343% since 1996. (Katherine T Hirono1, 2017)
Despite the claim of the public experts that increase tax will reduce consumption, the outcome will be significantly different. Imposition of tax on tobacco products has an equity implication that need to be considered while analysing the potential impact of excise tax on cigarettes and other tobacco products. The less affluent people who does not quit smoking despite the rise in price, tax comes to be regressive for them. As they are spending more of their income on tobacco products due to higher tax, they have less available income for food or other household products. It ultimately increases the inequality in the society. This is one major claim for which critics do not support tobacco tax policy. Thus whether tobacco taxation is a recommended policy option that depends on the evidence of efficacy in limiting the consumption and generating revenue. Policymakers must take into considerations the equity implications of tax increase while committing substantial tax increase in future. (Katherine T Hirono1, 2017)
Imposition of excise tax: demand- supply graph:
SS+t
Price
DD
SS
Tax
E1
P1
P0
E0
P2
Quantity demanded
Q0
Q1
The potential impact and the welfare implications of tax on cigarettes can be explained with the help of fundamental model of demand and supply. The cigarettes market is at original equili
ium level of E0 where the demand curve DD and the supply curve SS intersect to each other. Q1 is the equili
ium quantity and P1 is the equili
ium price before the tax is imposed.
Now a tax of T is assumed to impose on cigarettes. An excise tax will shift the supply curve to the left exactly by the amount of tax. SS+T will be the new supply curve. The market will reach to a new equili
ium point E1. At the point the equili
ium price has increased from P0 to p1 and the equili
ium quantity has come down from Q0 to Q1.
As far as the welfare impacts are concerned, both the consumer and producers will be worse off. Consumer surplus will come down because they have to pay higher price now. Producer surplus will also come down because the suppliers are receiving less. On the positive side, government will receive tax revenue and improve the budget deficit. As the price increases from P0 to p1, some smokers will find it unaffordable and quit smoking. Moreover, higher price will act as a disincentive for the...
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