Microeconomic Issue of Social Importance - Essay Example

On the other hand, the suggestion too from the literature is that cigarettes are addictive, and so the demand may in fact be somewhat inelastic. This means that it may be that driving up prices through taxation may not curb consumption as the authorities hope. Some studies suggest this somewhat, even as those studies also suggest that demand is elastic for young smokers, new smokers, and those who have low income. In the long run, therefore, as the population turns over, demand should go down due to taxation leading to higher cigarette prices.

The issue at hand is the determination of exactly how cigarette taxation impacts demand, such as in terms of the demographic characteristics of the market response to the taxation and other related aspects of demand. In general, in terms of supply and demand, we see from recent data and from insights from the literature that taxation has a large dampening effect on overall demand for cigarettes (Chaloupka;; Meier and Licari; Wasserman et al.). The overall take from the academic literature is that taxation does curb consumption.

Moreover, the higher the price increases resulting from higher taxes, the greater the reductions in demand and consumption. Other insights include that demand is more sensitive to price reductions rather than price increases. This means that reducing taxes can increase demand by a greater amount. This is in comparison to the reduction in demand from the same level of tax reductions. To illustrate, say taxes go down by 10 percent, and demand goes up by say 20 percent. Going the other way, if taxes go up by 10 percent, the demand does not go down by 20 percent, but just by half, at 10 percent for cigarettes.

These and other insights are useful in understanding the microeconomic aspects of the impacts of taxation on cigarette consumption and economics. The rest of the paper explores these impacts more closely (Sylvain; Bader et al.). Data from 2012 strongly supports the