Taxation

Question 1

The following figures relate to the demand and supply of cigarettes:

Price £ Q demanded (m) Q supplied (m)
7.00 600 1500
6.50 650 1400
6.00 700 1300
5.50 750 1200
5.00 800 1100
4.50 850 1000
4.00 900 900
3.50 950 800
3.00  1000 700
  1. Plot the demand and supply curves and show equilibrium price and quantity. 

  2. The government decides to impose a tax on cigarettes of £2.00 per pack.  Plot a new supply curve, and show the effect of this tax on:

  1. The price of cigarettes and, the amount of cigarettes consumed.

  2. From your graph estimate the incidence (burden) of tax on the consumer and producer.