Why are cigarettes and alcohol the most heavily taxed items

Why are cigarettes and alcohol the most heavily taxed items in the US? Now, if the government increases the price of these items by 10%, how does this affect the stores that sell them? Provide a detailed response.

Solution

Cigarettes and Alcohol are considered by the government to be Demerit Goods. Therefore, these items are heavily taxed by governments to discourage their consumption and ultimately reduce their demand and are addictive by nature. Tobacco can enhance the subjective effects of alcohol and has been shown to increase the risk for heavy and problematic drinking. Smokers drink more frequently and more heavily than non-smokers, and are substantially more likely than non-smokers to meet criteria for alcohol abuse or dependence These goods are known as inelastic goods, whereby the demand (and consumption) of the good doesn\'t change very much when there is an increase/decrease in prices.

A 10% increase in cigarette tax results in 4% fewer smokers, it means that once those smokers quit, it will diminish tax revenues that state and federal governments have come to rely upon. Local businesses, too, suffer as a result of cigarettes taxes. Due to a reduction in disposable income, community vendors and retailers will have fewer customers buying their goods.

*****