Describe the effects of an indirect tax (ex. sales tax) on the market for cigarettes.

The tax increases costs of production, moving the supply curve to the left by the amount of tax. There has been a fall in the equilibrium quantity and a higher price paid by consumers. The burden of tax on consumers vs. producers depends on the elasticity of demand of the product, for cigarettes, the price elasticity of demand (PED) is thought to be relatively inelastic and therefore consumers will bear the greater burden (show graphically). These taxes can be used as a way to correct market failure, from the overconsumption of a demerit good (cigarettes).