Economics · 2011 · November · Paper 3 · HL · Question paper

N11/3/ECONO/HP3/ENG/TZ0/XX ECONOMICS HIGHER LEVEL PAPER 3 Tuesday 15 November 2011 (morning) INSTRUCTIONS TO CANDIDATES  Do not open this examination paper until instructed to do so.  Answer three questions.  Use fully labelled diagrams and references to the text / data where appropriate. 2 hours 8811-5107 11 pages © International Baccalaureate Organization 2011 8811510 7 N11/3/ECONO/HP3/ENG/TZ0/XX 8811-5107 – 2 – 1. Study the extract below and answer the questions that follow. Taxes on cigarettes  Lawmakers in the state of West Virginia in the United States are proposing an increase in the state tax on cigarettes from US$0.55 to US$1.20 per pack.  One justification for the increase in the cigarette tax is that cigarettes are a demerit good . Smoking can cause premature deaths, and it leads to negative externalities in the form of additional health care costs and health hazards for non-smokers. It is estimated that the tax increase may prevent 6600 smoking-related deaths, and stop 13 200 children from becoming smokers. Some anti-smoking groups claim that increasing cigarette taxes is the most effective smoking prevention measure.  Other groups claim that the largest impact on smoking prevention is made by anti-smoking advertising on television and by programmes to help smokers quit. Cigarettes tend to have a lower price elasticity of demand (PED) than most other goods and services. Each 10 % increase in the price of cigarettes results in a 6.5 % drop in youth smoking, a 2 % drop in adult smoking, and a 4 % total drop. This means that the increase in the tax may not contribute significantly to smoking prevention, although it does generate large increases in tax revenues for the government. It is expected that the proposed increase in the cigarette tax will more than double annual cigarette tax revenues.  Also, the effectiveness of the tax as a smoking prevention measure may be lessened by the availability of cheaper cigarettes in states that are close to West Virginia that have lower cigarette taxes, such as Kentucky.  It is further argued that indirect taxes such as those on cigarettes are regressive taxes , and impact more strongly