Taxation and price controls have a wide range of affects on the economy; everything from an increase in costs to the reduction of the supply. With gas prices in the news everyday I am sure that many individuals will pick that topic to write about. I just had an interesting discussion with someone about cigarettes and its affect on society, and thought it would be an appropriate topic for taxation. Taxes that are levied to correct negative externalities such as tobacco are called pigovian taxes, or sin taxes. The government's motives have almost always been to generate revenue, but in more recent years taxes have also reflected an increasing concern with the need to minimize the health damage of smoking (the World Bank Group, 2001).
Pigovian taxes are government taxes that are added to products or services that are seen as vices, such as alcohol, tobacco and gambling. They are levied by governments to discourage individuals from partaking in such activities, so they would be considered consumer levied taxes.
Electronic Cigarette Inhalation
I took this photograph.
cigaretteWhen a tax is imposed on a good such as tobacco there is an increase in the price of the product, because of the negative relationship between price and demand, this shifts the demand curve of the product to the left; in other words, there is less demand for the product.
Due to the nature of tobacco, and its addictive properties, it would be classified as a luxury item rather then a necessity. In the past, researchers have argued that tobacco's addictive nature would make it an exception to this rule: smokers, according to this argument, are sufficiently addicted to smoking that they will pay any price and continue to smoke the same number of cigarettes to satisfy their needs. However, a growing volume of research now shows that this...