Question

Problem 18-4 The weekly supply and demand for packs of cigarettes in the United States is given in the figure below Price (S) Tools 36 r 34 32 30 MBsocial s-MCpvt MC social 24 20 18 F 16 F 14 12 10 MB 2468 1012141618 20 22 2426283032 Pack of cigarettes (millions)

Answer 1

(a)

The cigarette smoking causes a $6 per pack external cost on non smokers.

When the external cost is imposed then social marginal benefit is less than the private marginal benefit.

Following is the required figure -

(b)

If the external cost is not taken into account then the quantity produced of cigarettes would be that corresponding to which MB_pvt curve intersects 'S' curve. The quantity is 14 million packs of cigarettes.

So,

Assuming the externality associated with smoking is not faced by consumers, 14 million packs of cigarettes are consumed per week.

(c)

The efficient number of cigarette packs is that quantity corresponding to which MB_social curve intersects the 'S' curve.

This quantity is 10 million packs of cigarettes.

So,

The efficient number of cigarette packs is 10 million packs.