1. 1. Tax Effects Gains that would occur in the economic efficiency if all states were to adopt the same tax rate: Because excess burden rises with the square of the tax rate, a tax reduction in high-tax states would reduce excess burden by larger amount than the a tax increase in low-tax states. Decreasing excess burden is shown in the graph by subtracting defg from bcfg.

2. 2. Tax Effects Issues of smuggling and border effects: As described in the book, “the greater the difference in price across states for cigarettes, the greater the incentive for consumers to living near the border to cross the border to low-tax states and purchase cigarettes.” For example, people living on the border of New York and Pennsylvania not only have an incentive to save $2.75 on taxes by buying in Penn for themselves, but they are also incentivized to smuggle them across the state line and sell them for a profit to others as well!

3. 3. Tax Effects Equity issues that arise in Utah because of the relative high tax rate: The most prevalent equity issue is the fact that a relatively high tax rate on cigarettes in Utah acts as a regressive tax. $25,000 Income$100,000 Income (200 packs)($1.70).3% of income 1.3% of income Because the tax is regressive, the lower quintiles are hit with a greater burden and thus spend a larger proportion of their income on cigarettes.