Some people argue that the excise taxes on tobacco improve economic efficiency because consumption of these products imposes costs on third parties, i.e. involve negative consumption externalities.

1. Give an example of another product that is both taxed and in your view involves a negative consumption externality; explain what you think the externality is.

Lots of examples are possible. One that many people gave is alcohol, in that persons who consume excessive quantities of alcohol tend to behave in anti-social ways, imposing costs (the externality) on persons other than the person who sold them the alcohol. Another possibility is gasoline or diesel fuel, in that the emissions resulting from burning it may damage human, plant, or animal life, or dirty buildings and clothing, imposing costs on persons other than the producer and purchaser.

2. If you were given data that showed that low income people were more likely to smoke than high income people, would the tax on tobacco be called in the jargon progressive, proportional, or regressive? Why?

We had not talked about this yet. The answer is regressive. A tax is regressive if, on average, the ratio of tax paid to income decreases as income increases, i.e. lower income persons on average pay a higher percentage of their income as tax compared to higher income persons. If low income people are more likely to smoke than high income people, on average more low income people are buying cigarettes (and thus paying tax on tobacco) than high income people, so the "tobacco tax as percent of income" number for low income people in general will tend to be higher than for high income people [because the denominator, income, goes up, this would in fact still be so even if low and high income people had identical smoking habits, because then the tobacco tax paid by both groups would be the same, but the high income group has higher income so you are dividing by a bigger number].