Home > Microeconomics, Tax Policy > Tax Incidence and Elasticity

Tax Incidence and Elasticity


Here’s a free New Year’s day post to start your 2016 off with some economics!

First, read the news article:

New York state cigarette tax collections have plunged by about $400 million over the past five years, according to figures and estimates from the office of New York State Comptroller Thomas DiNapoli.

And New York has also lost $1.3 billion in uncollected state cigarette taxes each year from alternative sales, according to a separate study.

The state is taxing far fewer packs, as smokers evade taxed packs, shop across state lines or buy smokes from Native American merchants to avoid punitive NY taxes. A typical pack in New York costs $10.60 or more, including the nation’s highest state excise tax, $4.35.

Then, try to answer these questions:

(1) Who do you think the New York state government was trying to put the burden of the tax on: smokers, or sellers of cigarettes?

(2) Who actually seems to be bearing the greater tax incidence? How can you tell? Was that what the state government intended?

(3) Do you remember…when the size of the tax doubles, what goes up by more than double? Does tax revenue always increase?

(4) “If you want ____ of something, tax it.” Do you think the state government intended to have this effect on the cigarette market?

(5) What kind of externalities does cigarette smoking produce? Can you think of other ways the state government could have tried to deal with the externalities?


Categories: Microeconomics, Tax Policy
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