Chapter 6

New York City has the highest cigarette taxes in the country. During the four months following the recent tax hike, sales of taxed cigarettes in the city fell by more than 50 percent as consumers turned to the city's bustling black market. The thriving illegal market for cigarettes has diverted billions of dollars from legitimate businesses and governments to criminals. Source: Cato Institute, February 6,2003 a. How has the market for cigarettes in New York City responded to the high cigarette taxes? b. How does the emergence of a black market impact the elasticity of demand in a legal market? c. Why might an increase in the tax rate actually cause a decrease in the tax revenue?

Floyd Mayweather Jr. and Manny Pacquiao will fight tonight in Las Vegas in a match which people have been waiting for almost six years. The police said that there are concerns regarding illegal scalping of tickets and it would be monitored. Source: $LA$ Times, May 2,2015 a. Draw a graph of the market for tickets sold by scalpers, assuming that there are no effective penalties on either buyers or sellers. b. If the police have caught the scalpers and 2,000 tickets have been seized, how would it change the market outcome? Show the effects in your graph. c. With no penalty on buyers, if a penalty for breaking the law is imposed on ticket scalpers at more than $\mathrm{\$}500$ a ticket, how does the market work and what is the equilibrium price? dith no penalty on sellers, if a penalty for breaking the law is imposed on buyers at more than $\mathrm{\$}500$ a ticket, how does the market work and what is the equilibrium price? e. What is the marginal benefit of a ticket bought from scalpers in the situations described in parts (c) and (d)? f. In light of your answer to part (e), why does law enforcement usually focus on sellers rather than buyers?