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Project Introduction: Different economic studies estimate the price elasticity of demand for certain goods, some of which are reported on page 176 of the Hubbard/O’Brien textbook. The following table presents select elasticity of demand estimates from those reported on page 176. Product Estimated Elasticity Barnes & Noble books -4.00 Coca-Cola -1.22 Cigarettes -0.25 Beer -0.23 Gasoline -0.06 Part 1: In your project, address the following questions: Using the elasticity estimates in the table above, classify the price elasticity demand as elastic or inelastic. Explain your reasoning. Explain the implications of those classifications on tax revenue collections when the per-unit tax increases as opposed to decreases. Using those classifications, make some assumptions regarding tax incidence. For instance, will buyers or sellers pay a larger portion of the tax per unit? Explain. Based on the elasticity classifications, their effect on tax revenue, and tax incidence, which goods would the government prefer to tax? Part 2: In your project, address the following questions in this order: Using the ITT Tech Virtual Library, research tax rates imposed on cigarettes for the state in which you reside and two surrounding states. Discuss the changes in tax rates on cigarettes in those states over the last few years. Predict the implication of this tax rate change on tax revenue according to theory. ES2550: Project Page 2 Research the effect of changes in cigarette taxes on tax revenue for a state. Does this change indicate cigarettes have an elastic or inelastic demand in that state? Support your answer. Course Objectives Tested: 1. Explain key microeconomic terminology. 3. Create and use economic graphs and numerical models to analyze and solve microeconomic problems. 5. Analyze the impact of government activity in markets. 6. Determine optimal consumer buying decisions in the context of utility theory.
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