If the price of cigarettes increases, not only will the quantity of the cigarettes fall but simultaneously it may also affect other commodities. The aspect of income elasticity will also be incorporated here, which will show us whether income and demand for cigarettes move together or not.
Lately the world economy has been more concerned about the harmful effects of smoking. Though, from time immemorial, people are trying to resort to drugs or other narcotics, this gives them a tranquilizing effect in their minds. One of the most common intoxicants is a cigarette, which serves as the escape route from their harsh realities of life. In the recent times, smoking has taken the shape of an epidemic, which is affecting not only people’s minds but also their lives. Many steps have been taken, such as campaigns showing how smoking is injurious to heath or health programs to restrict the usage of cigarettes per day. In spite of this, people are reckless to quit smoking, as they find no perfect substitutes of it. In regard to this the governments of all the countries are starting a new tax regime especially US government. This consists of an increase in the price level of cigarettes by the imposition of proportional tax or a lump sum tax. By proportional tax structure, a particular rate of tax is imposed on price of cigarettes. In respect to the US governments the tax structure usually takes the form of excise or sales tax. Here, a fixed rate of cents is imposed on the price of cigarettes. Let the tax rate‘t’ be imposed on the price of cigarettes, ‘p’, the new price is now ‘p (1+t)’. According to the law of demand, the price and demand of a normal good are negatively related. Here, cigarette is a normal good since with the fall in price, smoking becomes more attractive and popular among the individuals. The following diagram shows the