The government regulates the price of Cigarette’s through Indirect taxes. Indirect taxes are imposed on spending to buy goods and services. These taxes are paid partly by consumers, but are paid to the government by producers, which is why they are called indirect. When the indirect tax is imposed on particular good and services, such as petrol and cigarettes, they are known as excise taxes. The reason why this method of regulating prices is so successful is due to the inelastic demand of Cigarette’s. Price elasticity of demand is a measure of the responsiveness of the quantity of a good demanded to changes in its price. Demand is price inelastic when the percentage change in quantity demanded is smaller than the percentage change in price. However despite the peoples protest cigarettes are demerit goods, these are goods that are considered to be undesirable for consumers and are over-provided by the market. The percentage change in quantity demanded is smaller than the percentage change in price, so the value of PED is less than one; quantity demanded is relatively unresponsive to changes in price, and demand is price inelastic. As 0.153 is less than one therefore the demand for cigarettes is price inelastic. There are several reasons why: Firstly there are almost no substitute’s for cigarettes, therefore even when the price does increase the consumers have no other choices so they keep smoking. Cigarettes are extremely addictive, meaning people will keep smoking even If the price increases as they feel that they cannot live without it. Lastly, a very small proportion of people’s income is spent on cigarettes in China. Which is why China is being encouraged to raise its taxes. People will not hesitate to buy a pack because it is so cheap. Since there are millions of Chinese who still face poverty today, bringing the price up by 1 RMB brings a 3 million decrease in smokers, whereas in other countries which are developed, thi