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"Our Rollers Are Worried"


The new tax hike on tobacco products went into effect yesterday. There are few better examples for Econ 1, and the players involved clearly understand the issues. For cigars, my smoke of choice, the tax on good domestically produced cigars rises from 5 to 40 cents. “Many of our rollers are worried,” Hector Ventura, operations manager for El Credito, told the Associated Press. “They think that if we have less sales, they will lose their jobs. We know for sure the tax increase will reduce our sales. It’s not good for our business, not good at all.”
He’s right that his sales will drop; and his workers understand that labor demand is derived from product demand, so the demand curve for labor will shift rightward.
As always, the important question is, “How much?” Evidence suggests that the demand for tobacco products generally is not very price-elastic; and I’d bet that the demand for better cigars is less elastic than for most tobacco products. So I don’t think sales or employment will drop much. And some of the reduction will come because those who like risk — and want the very best — switch to untaxed but illegal Cuban cigars: the number of Cohibas and Montecristos smoked in the U.S. will rise!