Excise Tax On Cigarettes

In April, the excise tax on cigarettes in California increased from $0.87 to $2.00 per pack. The higher taxes were imposed in order to prevent people from smoking. Due to the increase in the excise tax, the retailers are experiencing challenges because of the decrease in the demand for cigarettes to about 50 percent. Not only the retailers who are selling the cigarettes are suffering, but also the tobacco companies are also suffering. Therefore, tobacco companies are sending out coupons to make more people buy cigarettes in order to keep running their market.

Market failure occurs when there is an allocative inefficiency of resources within the market. There are many reasons to why market failure can occur and one of them is due to the negative externality of consumption. The negative externality of consumption is when the marginal private benefits (MPB) of the consumers are greater than the marginal social benefits (MSB).

The market for cigarettes is an example of market failure since the cigarettes have negative externalities of consumption, ceteris paribus. The consumption of …show more content…
In order to reduce the amount of people from smoking, the government increased the excise tax, which are taxes paid when a specific good is purchased, on cigarettes from $0.87 to $2.00 per pack in April. The tax imposed on cigarettes are specific tax, a type of excise tax, which has a fixed amount of tax per unit of good sold. In Diagram 2, it shows how increasing the amount of tax decreased the quantity from Qtax to Qtax 2, ceteris paribus. It also shows how the price has went up from Ptax to Ptax 2. As higher taxes are imposed, lower quantities are acquired because people are less willing and able to buy cigarettes at a high cost. As less people are buying the product, the producers are not able to produce as much as they could because they cannot make the same amount of profit at a lower