The Australian government has imposed an excise tax on tobacco products since 1901. An excise tax is a specific tax or an ad valorem tax placed on a particular good or service. The tax placed on tobacco was a ad valorem tax because it was a percentage and not a specific dollar amount. From midnight on the twenty ninth of April 2010, the Australian government increased the excise tax on cigarettes by twenty five percent. It was the first major increase in excise tax for tobacco in over a decade. The excess on cigarettes was increased from $0.2622 to $0.32775 per stick. The additional revenue, along with existing tobacco revenue was to be invested in improving health and hospitals (Department of health and ageing 2011). The increase in the excise tax had a profound effect on the demand of cigarettes and the tax revenue.

When the tax was introduced onto the in created a change in the market for cigarettes. The tax on the cigarettes caused the marginal cost of cigarettes to increase. On the supply and demand curve diagram, (figure 1), the increase is shown by an upward movement in the supply curve, also known as the marginal cost curve, because of the additional costs placed onto producers. The twenty five percent excise tax meant that producers were faced with an additional cost increase of twenty five percent cost increase of every packet of cigarettes sold. The impact of this on the market can be shown as an increase in the marginal costs of cigarettes or decreases in the supply of cigarettes. At every quantity of cigarettes sold the marginal cost has increased by twenty five percent. The vertical distance between the original supply curve and the new supply curve represents the actual amount of the tax. The excise tax also affects the equilibrium price of cigarettes and the equilibrium quantity of cigarettes. The consumers and producers also have to burden the