Economics Questions

Topics: Supply and demand, Externality, Pigovian tax Pages: 3 (671 words) Published: January 7, 2015

28.11.2014

Economics Questions

a) Explain three factors that could lead to an increase in demand for cigarettes

All three factors that affect the demand curve are non-price related. This is why it affects the demand curve.

The first factor that could increase the demand for cigarettes is an increase in population. There the increase in population makes the potential number of buyers increase, thus the demand curve shifts to the right.

Another factor that can affect the demand curve for cigarettes is the increase in salary. When the consumer’s salary increases, they can effort more things, such as cigarettes, and also people who were not able to afford it with their low salary, might now that their salary has increased afford certain goods that they were not able to get before. In this case cigarettes can be seen as a luxury, because it is not a necessity. This would all cause the demand curve to shift to the right and therefore increase.

The last factor that could increase the demand of cigarettes, could be seasonal changes, because in winter, the consumers might not feel the urge to buy cigarettes, because in many countries you are not allowed to smoke in restaurants, and they would therefore have to smoke outside in the cold, which might not seem too appealing to the consumer, which would lower the demand. In contrary in summer, the consumers can stand outside with nice weather and smoke, which most smokers might enjoy, thus the demand increases in summer

b) Discuss three policies a government might use to reduce the consumption of a demerit good such as cigarettes.

There are three main polices tat government could use to reduce the consumption of a demerit good such as cigarettes, which are related to the negative externalities of consumption.

A negative externality is a cost that is suffered by a third party as a result of an economic transaction. In a transaction, the producer and...
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