A government is considering placing a tax on cigarettes to raise revenue to finance health-care benefits. One of the arguments for this tax is that the demand for cigarettes is price inelastic. Which of the following statements is TRUE?
◦ No tax revenue can be raised in this way because sellers of cigarettes will just lower their price by the amount of the tax and therefore the price of cigarettes to consumers will not change.
◦ This tax will not raise much revenue either in the short term or the long term since demand is price inelastic.
◦ This is a very good way to raise revenue both in the short term and in the long term because there are no substitutes for cigarettes.
◦ The tax on cigarettes may not raise as much revenue as anticipated in the years to come because the demand for cigarettes is likely to become more elastic over time.
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