Studies have shown that the demand for tobacco tends to be highly price inelastic. Evaluate the view that government can best reduce smoking by substantially increasing taxes on cigarettes.

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When a good or service is highly price inelastic, its demand will stay high no matter how expensive it is (within reason). If a government raises taxes on a particular good, that tax will be passed on to the consumer, meaning it will become more expensive. In this case, because...

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When a good or service is highly price inelastic, its demand will stay high no matter how expensive it is (within reason). If a government raises taxes on a particular good, that tax will be passed on to the consumer, meaning it will become more expensive. In this case, because cigarettes are bad for us, increasing spending on healthcare among other social costs, governments might try to limit smoking by putting a large tax on tobacco, which would make cigarettes so expensive that many smokers might quit because they are no longer able to afford to buy cigarettes. The fact that tobacco is price inelastic suggests that this approach will be of limited effectiveness. Cigarettes are highly addictive, and people will continue to buy them (again, within reason) even if they are very expensive. This does not mean a government should not tax cigarettes--in fact, it might mean that cigarettes could become an important source of revenue. It simply means that taxation with the purpose of curbing smoking may not be as effective as planned. 

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