Outline the effects of a lump-sum tax on companies selling cigarettes and who ends up bearing the burden of the tax. You should assume that there was previously no taxation in this market.

A lump sum tax is a specific tax, it is a fixed amount charged to producers which can then be offset onto consumers. It is characterised as being the same amount of tax charged across all income levels, for example sugar tax. As the market is the cigarette industry, the demand is going to be inelastic as cigarettes have addictive properties and so consumers are not going to respond greatly to a change in price. However, supply could be more elastic as it can be increased quickly due to the ability to build up stock. Although, if cigarette manufacturers are working at full capacity this means that output will be difficult to increase. A diagram can be used to demonstrate that a lump sum tax will lead the consumer carrying a large amount of the tax burden and the producer only faces a small share of the burden, due to the inelastic nature of demand the elastic nature of supply. The lump sum tax means the price of cigarettes will rise and the quantity demanded will fall but not by a significant amount. Following on from this, the tax could lead to a slight fall in profits, as despite consumers taking the burden of most of the tax increase, the producer still has to take the burden of some of the tax and this along with the fall in quantity demanded could reduce profits. The fall in quantity demanded could lead to a fall in revenue as the increase in price is to cover the tax and won't generate additional revenue and so a fall in output could lead to a fall in revenue. A diagram can be used to show the increase in price of cigarettes, a fall in the quantity demanded and the tax revenue collected by the government.