Future Business Leader Achievments (FBLA) Economics Practice Exam

What is one of the reasons local, state and federal governments tax cigarettes?

1. Demand is elastic, so sales won't decrease very much when the price goes up

2. Demand is elastic, so revenue will go up when the price goes up

3. Demand is inelastic, so sales won't decrease very much when the price goes up

4. Demand is inelastic, so sales will fall when the price goes up

The correct answer is: Demand is inelastic, so sales won't decrease very much when the price goes up

Governments tax cigarettes primarily because the demand for them is inelastic. This means that when the price increases due to taxation, the quantity demanded by consumers does not decrease significantly. People who smoke often continue to purchase cigarettes despite rising prices because they have a strong preference for the product and may be dependent on it. By recognizing that the demand for cigarettes is inelastic, governments can impose higher taxes without causing a significant drop in sales volume. This leads to increased tax revenue, which can be allocated toward public health initiatives, smoking cessation programs, or other government expenditures. Inelastic demand indicates that consumers are less responsive to price changes, allowing the government to create a steady source of revenue while discouraging smoking through higher prices.