Tax on Tobacco in the UK Coursework Example | Topics and Well Written Essays - 1000 words

Tax on Tobacco in the UK - Coursework Example Tobacco tax in the UK has increased over the years, data collected from the tobacco manufacturers association (2009) shows that in 1990 the amount of tax per 20 cigarettes amounted to 1.2 pounds while in 2009 the tax had increased to 4.34, the following chart summarises taxes over the years: The above chart shows an increase in the level of tax per 20 cigarettes for the period 1990 to 2009. However according to the ACT on tobacco and health state that despite this increase in taxes, tobacco taxes are only adjusted in line with the rate of inflation and therefore have no major effect on tobacco consumption. Tobacco taxes are imposed for various reasons, these taxes are imposed in order to reduce tobacco use in the economy and therefore improve public health. However, the price elasticity of tobacco is an important factor to consider when imposing the tax in order to determine whether the price increase will reduce consumption to the desired level. Price elasticity of demand refers to the decline in demand when the prices are increased, the price elasticity value identifies the sensitivity of demand to a price change, price elasticity value of negative one means that a 4% increase in price will increase reduce demand by 4%, a value greater than negative one example -0.05 means that the demand is price inelastic while a value less than negative one example -4 means that we have relative elasticity, the following diagram demonstrates the nature of these demand curves that are inelastic, unitary and elastic. (Gregory Mankiw, 2002) From the above diagrams, it is evident that in diagram one a price increase by one from price 1 to price 2 will reduce demand by one unit from quantity 2 to quantity 1, the price elasticity value here will be -1 and, therefore we have unitary elasticity.