TWO WAYS REDUCE THE QUANTITY OF SMOKING DEMANDED

Public policymakers often want to reduce the amount that people smoke. There are two ways that policy can attempt to achieve this goal.

One way to reduce smoking is to shift the demand curve for cigarettes and other tobacco products. Public service announcements mandatory health warnings on cigarette packages, and the prohibition of cigarettes advertising on television are all policies aimed at reducing the quantity of cigarettes demanded at any given price. If successful these shift the demand curve for cigarettes to the left as in panel.

Alternatively, policymakers can try to raise the price of cigarettes. If the government taxes the manufacture of cigarettes for example cigarettes companies pass much of his tax on to consumers in the from of higher prices. A higher price encourages smokers to reduce the numbers of cigarettes they smoke. In this case the reduced amount of smoking does not represent a shift in the demand curve. Instead it represents a movement along the same demand curve to a point with a higher price and lower quantity as in panel.

How much does the amount of smoking respond to changes in the price of cigarettes? Economists have attempted to answer this question by studying what happens when the tax on cigarettes changes. They have found that a 10 percent increase in the price causes a 4 percent reduction in the quantity demanded. Teenagers are found to be especially sensitive to the price of cigarettes: A 10 percent increase in the price causes a 12 percent drop in teenage smoking.

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If you have ever received a paycheck you probably noticed that taxes were deducted from the amount you earned. One ot these taxes is called FICA an acronym for the Federal Insurance Contribution Act. The federal government uses the revenue from the FICA tax pay for Social Security and Medicare the income support and healthcare programs for the elderly. FICA is an example of a payroll tax which is a tax on the wages that firms pay their workers. In 2005 the total FICA tax for the typical worker was of earnings. Who do you think bears the burden of this payroll tax firms or workers. When Congress passed this legislation it tried to mandate a division of the tax burden. According to the law half of the tax is paid by firms and half is paid by workers. That is half of the tax is paid out of firms revenues and half is deducted from workers paychecks. The amount that shows up as a deduction on your pay stup is the worker contribution. Our analysis of tax incidence ho

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