Question

The government of Selgina is very serious about drugs.
Possession of drugs is illegal and is severely penalized.
However, a black market exists which the government has failed
to dismantle despite serious attempts. KhusenichhoChamling,
the health minister, is worried about the situation. In early 2009,
a consultant working with health ministry suggested that the
government should increase the price of a pack of cigarettes
from 200 Selgina dollars (SS) to S$600. A survey conducted in
December 2009 suggested that over the year, the quantity
demanded of marijuana decreased from 2,000 kgs per day to just
800 kgs. Calculate the cross elasticity of demand and tell why
has the policy proved so effective

Answer 1

Answer -

Cross price elasticity of demand

= % change in quantity of one good / % change in price of other

= (-60) % / 200 %

= (-0.3)

Cross price elasticity of demand is -0.3.

This means that the marijuana and cigarettes were complementary goods as the cross price elasticity came out to be negative.

This was effective was the government raised the price of cigarettes . The quantity demamded for cigarettes will fall because of law of demand. Marijuana was complementary to cigarettes. Hence its demand will also fall. The government could control two addictive things by just one tool here. Hence this policy was effective.