Explain the possible effects on consumers and producers when

imposing an indirect tax on cigarettes

An indirect tax is an expense imposed upon a specific product by the government. A

consumer in an economy is one who purchases goods or service. A producer is one
who sells goods or services within an economy.

This diagram gives an example of an indirect tax imposed on cigarettes, where the
indirect tax is shown by the shift of s to s + tax, and the increase of supply is due to
increased costs of production of the firm. The firm’s revenue has decreased from
0P VQ to 0CZQ . The extra profits the firm is making, which is represented by CP XZ
e e 1 1

is the tax burden, shared by the producers and consumers, which goes to the
government. The consumer’s burden of the indirect tax is shown by the increase in
price from P to P , and due to an increase in price, the demand and quantity has
e 1

fallen. Finally, the producer’s burden of the tax is represented by CP YZ.

e

When a government imposes an indirect tax on cigarettes, the effect on the

consumers are that they must pay some of the tax burden, which is simply a higher
price for the product. This then, by the Law of Demand, will decrease the demand for
the cigarettes, as to which extent is determined by the elasticity of cigarettes, which
is low due to it being an addictive substance ← Wasn’t sure if I was meant to talk
about this or not. The effect on producers are that their revenue drops, as the
quantity demanded by consumers is lower, and the extra profits they would be
making by the price increase of cigarettes goes to the government’s hands instead of
them. An example of this is the cigarette industry in Australia, where the government
has been constantly indirectly taxing cigarettes more and more, which constantly
increases the price of the product.