Explain the possible effect on consumers and producers when a specific tax is imposed on cigarettes.

The effects on costumers and producers when a specific tax is imposed are dependent on the type of good. As for this case we consider the cigarette market, the demand for them will be inelastic. This nature is caused simply by the fact that because cigarettes are addictive, even higher prices won´t stop people who really need them from buying them. This means that consumers will consume (demand) less than before, but not significantly. The tax burden is in this case by much larger amount on the consumers. On the other hand the producers won´t be significantly affected as due to the inelastic demand, there will be only a little decrease in demand for cigarettes and therefore just a smaller drop in income for cigarette producers. Also when the demand drops slightly this means that the cigarette companies will produce less.