Taxes on necessities that have low demand elasticities im-pose large excess burdens because consumers can’t avoid buying them. Do you agree or disagree with that statement? Explain. You are given the following information on a proposed “cigar tax” in the Republic of Panatela. Panatela collects no other specific excise taxes, and all other government revenues come from a neutral lump-sum tax. (A lump-sum tax is a tax of a fixed sum paid by all people regardless of their circumstances.) Assume further that the burden of the tax is fully borne by consumers. Now consider the following data: Cigars consumed before the tax: 18 million Cigars consumed after the tax: 14 million Average price per cigar: $20 (not including the tax) Tax rate: 25 percent Estimate the size of the excess burden of the tax. What is the excess burden as a percentage of revenues collected from the tax?
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