ECO402 GDB.01 Solution and Discussion

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The Case:

The estimated number of smokers all around the world is 680 million and about 80% of them live in the low-income and middle-income countries. Over 100,000 Pakistanis die each year from tobacco related diseases. Majority of these deaths result from lung and other cancers, respiratory diseases, strokes, ischemic heart and other cardiovascular diseases. World Health Organization (WHO) advocates strict tobacco control laws, large-sized pictorial health warning on packs and plain packaging, comprehensive ban on tobacco advertising promotion and sponsorship, implementation of “health tax” on tobacco products and increased taxation as well as continued health awareness campaigns. In budget 2019-2020, Federal Excise Duty (FED) on cigarettes has been increased that would mobilize Rs. 147 billion revenue, compared to estimated Rs. 114 billion for 2018-19. Further, Government of Pakistan has also announced Rs. 10 health tax per packet of 20 cigarettes.

Requirement:

Logically discuss the impact of the implementation of health tax on cigarettes on the consumers and producers.

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eco402-gdb-01-solution

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Impact of health Tax

On Producer Side

When the government imposes tax on output of a firm it increases firm’s marginal cost by the amount of the tax. In return the firm will reduce output to the point at which the marginal cost plus the tax equals. Sales tax shifts supply curve inward.

When the Govt. implemented the health tax the output of the firm reduced to maintain as there is an effect on demand side that the output level is reduced from 01 to Q2

On Consumer Side

When the govt increases or implements the tax on goods, these taxes influence the consumer behavior. The immediate effect is the price level of the goods increased so the demand for

goods reduced because it reduces the buying power of the consumer so consumer buy less p with these prices.

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