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Doubling of the tax on cigarettes

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Suppose that the price elasticity of demand for cigarettes is unity (=1) at all possible quantities. Currently, 30 million packs of cigarettes are sold per year, and the price averages $2 per pack. Assuming that the price elasticity of supply of cigarettes is 1 and the current tax rate is $0.40 per pack, calculate the current excess burden of the tax on cigarettes. Suppose the tax per pack is increased to $0.80 per pack. What will happen to the excess burden of the tax as a result of the tax increase? Under what circumstances can a doubling of the tax on cigarettes actually improve resource use in the country, despite the increase in the excess burden of the tax?

Reference no: EM132764357

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