Question

Explain why a tax on cigarettes is likely to increase the government’s tax revenues.

Answer 1

The Center for Tobacco Control Research and Education does admit that tobacco taxes contribute to the reduction of smoking and tobacco use in general but says it does not find them very effective. The reason being that since the tax affects the price, small increases will not necessarily dissuade consumers from buying tobacco products. And in these cases — with smaller tax hikes — cigarette companies may even lower their prices to compensate.

The cigarettes are inelastic goods. So small price change doesn't affect the demand of the cigarettes. So if government increases the tax, normally price of the cigarette also increases. Still there will not be any decline in the consumption. So additional tax revenue is acquired by the government through cigarettes.