Question: Here we examine the effects of domestic sales taxes on the market for exports, as an example of the "targeting principle." For example, in the domestic market, there are heavy taxes on the purchase of cigarettes. Meanwhile, the United States has several very large cigarette companies that export their products abroad.
a. What is the effect of the sales tax on the quantity of cigarette exports from the United States? Hint: Your answer should parallel the case of production subsidies but for a consumption tax instead.
b. How does the change in exports, if any, due to the sales tax compare with the effect of an export subsidy on cigarettes?