IF I have a perfectly elastic supply (horizontal), and the unit price of cigarettes goes up by increasing cigarette tax from 8 cents to $1.50, I know the quantity demanded goes down, but what happens in the long term (specifically in regards to tax revenues of the city?)

Question

IF I have a perfectly elastic supply (horizontal), and the unit price of cigarettes goes up by increasing cigarette tax from  8 cents to $1.50, I know the quantity demanded goes down, but what happens in the long term (specifically in regards to tax revenues of the city?)

economyst · Answer

I'm not sure if you are asking for help in solving a simple and specific economics problem (What happens to tax revenues in a community if they raise taxes on cigarettes?) Or a more general question involving the character of the long run demand for cigarettes in light of government policies. That is, does the future for cigarettes change if there is a large increase in prices today?

In the simple case, I suggest you draw supply and demand diagrams and "model" what happens to revenues if the tax rate rises from .08 to 1.50.

I hope this helps.