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ME0008-1

Teaching Note

Ban on Public Smoking vs Imposition of

Tax on Tobacco

Prerequisite Conceptual Understanding

• To understand the impact of tax on price and quantity and the share of the ultimate tax burden –
Samuelson Paul A. and Nordhaus William D., “Application of Supply and Demand”, Economics,
15th International Edition ( ISBN 0-07-113914-1), McGraw-Hill, Inc., 1995, pages 57–71

Synopsis of the Case Study

This case helps the students to identify major demand and supply factors affecting addictive substances like
tobacco products and to discuss the concept of movement along the demand and supply curves, shift in
demand and supply curves and impacts of policy interventions like tax or ban of a product on consumption.
The case discusses the application of demand and supply analysis, link between elasticity and revenue and
impact of taxation on price and quantity.

Pedagogical Objectives
• To understand the impacts of tax on prices and quantity
• To understand the concept and types of price elasticity and the basis of share of tax burden
between the buyer and the seller
• To understand the link between price elasticity and sales revenue
• To weigh the effectiveness between ban on smoking and tax on tobacco.

Assignment Questions
I. Discuss the impacts of tax on prices and quantity with reference to tax on smoking.
II. Discuss the concept and types of price elasticity. Explain how the tax burden is shared between

This teaching note was written by Dr. Shailaja and Dr. Seshaiah, Associate Dean (Professors of Economics Department), IBS,
Hyderabad. It is only an illustrative orchestration of the case study ‘Ban on Public Smoking vs Imposition of Tax on Tobacco’. It is never
meant to limit the learning outcomes.

© 2009, IBSCDC.
No part of this publication may be copied, stored, transmitted, reproduced or distributed in any form or medium whatsoever without
the permission of the copyright owner.
 ME0008-1

Teaching Note Ban on Public Smoking vs Imposition of Tax on Tobacco

the buyer and the seller.

III. Explore the link between price elasticity and revenue with special reference to addictive substances.
IV. Between ban on smoking and tax on tobacco, which one would you support? Substantiate your
stand with economic logic.

Teaching Plan
The Teaching Note and Structured Assignment of the case study follow a specific Teaching Plan [Annexure
(TN)-I]

Case Analysis

I. Discuss the impacts of tax on prices and quantity with reference to tax on
smoking.
The case is an application of demand and supply analysis using impact of tax on price and quantity with
respect to an addictive substance [Exhibit (TN) –I]. When P0T tax is imposed, the price is increased from
OP0 to OP1 and the quantity is reduced from OQ0 to OQ1.

Exhibit (TN) -I
Impact of Taxation

S1

T S0
P1 E1 Tax
P0 E0

D
0 Q1 Q0
+--

Prepared by the authors

The instructor may discuss the following issues:

• Suppose the government imposes a unit tax per unit of output
• Assume Market is perfectly competitive
• How do demand and supply determines the price and quantity?
• How do we analyse the government intervention on market equilibrium?

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Teaching Note Ban on Public Smoking vs Imposition of Tax on Tobacco

II. Discuss the concept and types of price elasticity. Explain how the tax burden is
shared between the buyer and the seller.
Given the students’ prerequisite conceptual understanding on factors affecting demand and supply, the
instructor may discuss various concepts of price elasticity, impact of increase or decrease of price on quantity
consumed, impact of unit tax on price and quantity and corresponding impact on total revenue. When P0T
tax is imposed, P0P1 is the price increase and hence the share of tax burden borne by the consumer. The
balance of the tax share is P1T which is obviously borne by the seller [Exhibit (TN) –I].
Explore the link between price elasticity and revenue with special reference to addictive substances.
The instructor may discuss the following issues:
• The Impact of a Decrease in Price of product on Total Revenue:
• If Demand is Elastic (Ed >1), then a reduction in price of product will lead to increase in total
sales revenue (WHY?)
• If Demand is Inelastic (Ed < 1), then what happens to total revenue if price of the product is
reduced?
• If Demand is Inelastic (Ed < 1), then what happens to total revenue if price of the product is
increased?
• If Demand is Unitary Elastic (Ed =1), what happens to total revenue due to decrease in price?
The instructor may summarise the above relationships between price elasticity and revenue
[Exhibit (TN) –II] for easy comparison.

Exhibit (TN) –II

Relationships among Elasticity, Price Change and Total Revenue

Price Elasticity If Price Change in

Elasticity Coefficient Total
Revenue
Elastic Ed > l t Decrease
Elastic Ed > I l Increase
Unitary Ed = l tl No change
Inelastic Ed < l t Increase
Inelastic Ed < l l Decrease

Prepared by the authors

III. Between ban on smoking and tax on tobacco, which one would you support?
Substantiate your stand with economic logic.
The instructor may give the following clues to encourage class discussion: higher taxes’ efficacy in curbing
consumption, difficulty of tax collection from unorganised sector of non-cigarette forms of tobacco, the
search for economically viable alternative crop, which is as remunerative to the farmer as tobacco, opposition
to public ban from the smokers.

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