Question

Cigarettes in Australia have long been subject to excise tax – a per cigarette tax
levied on the suppliers of cigarettes. (The tax applies to all tobacco products,
however for the purposes of this is to assume cigarette and tobacco consumption
are the same thing). In 2016 the federal government announced that the excise tax
rate for cigarettes would rise by 12.5% a year for the next 4 years. Over this period
tax revenue collected from the sale of cigarettes has increased considerably. Legal
cigarette consumption has fallen to an all-time low in Australia due to a combination
of the tax on cigarettes, and public health initiatives such as plain packaging, health
warnings and banning advertisements.
Part (a) Consider the following two policies aimed at reducing cigarette smoking:
(i) A tax on the suppliers of cigarettes, and
(ii) The public health campaign initiatives.
Illustrate both of these policies separately using a fully labelled and explained
demand and supply diagram for each of parts (i) and (ii). Do not use actual numbers;
this is intended as a theoretical exercise.
Compare and contrast the impact on equilibrium price and quantity of cigarettes of
each of these policies, explaining your answer with reference to the diagrams.
Consider the impact of each policy on government revenue. Explain your answer.
Can the impact on government revenue be illustrated on either of your diagrams? If
so, indicate and explain the area on the diagram/s that represents government
revenue.

Answer 1

In both the policies, the quantity demanded will be reduced and equilibrium price will increase in case (1) and equilibrium price will decrease in case(2). {Tax incidence falls both on buyers and sellers which depends on elasticities}

Yes, government revenue will increase by imposing tax in case (1) but compaign initiatives will not increase any revenue.

Yellow labelled area in case (1) depicts the government revenue.