Administration proposed raising the federal tax nearly a dollar to $1.95 per pack. The key question is: How

much would cigarette purchases decline?

Taxes on cigarettes serve two purposes: to raise tax revenue for government and to discourage cigarette

consumption. However, if a higher cigarette tax discourages consumption considerably, meaning a greatly

reduced quantity of cigarette sales, then the cigarette tax on each pack will not raise much revenue for the

government. Alternatively, a higher cigarette tax that does not discourage consumption by much will actually

raise more tax revenue for the government. Thus, when a government agency tries to calculate the effects of

altering its cigarette tax, it must analyze how much the tax affects the quantity of cigarettes consumed. This

issue reaches beyond governments and taxes. Every firm faces a similar issue. When a firm considers raising
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