Efficient tax push personal expenses, the left edge, creating incentives for companies to reduce production.
Taxes effectively. Push the marginal private cost to the left creating an, incentive for the company to reduce production.
.If the tax is not large enough to shift the marginal private cost sufficiently to, the left then there will still be too. Many cigarettes because the cost will not be fully internalised.
In addition most taxes, are not continuous and are not. Linked to the amount of cigarettes produced or the amount of pollution released. This means that a one-off tax may have. Little long-term effect.
.The advantages of tax are clear: if the amount of tax levied, is correct then they are an easy and simple way to internalise. The costs.
However the effectiveness, of any tax also depends upon the price elasticity of the good in question: cigarettes,, Primarily because of influence of habit and also because of the lack of any close or viable substitutes are relatively,, Price inelastic.This means that if the government levied a tax on a tobacco company the increase, in costs could be passed on to the consumer. In the form of higher prices.
The company would not lower production of cigarettes enough to cover, the externality and. There would still be market failure. Higher taxes may then have an inflationary effect on the economy if producers do choose. To pass on the costs.
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