Answer to Question #209577 in Microeconomics for Jeremy Levu

Question

a) Explain why cigarette smoking is often described as a good with negative externalities. (3m)

 

b) Why might a tax on cigarettes induce the market for cigarettes to perform more efficiently? (3m)

 

c) How would you evaluate a proposal to ban cigarette smoking? Would a ban on smoking necessarily be economically efficient? (4m)

 

Answer 1

a) Cigarette is termed as a good with negative externality in that it satisfies human wants but has a negative impact on a third party. For example, it causes health issues to both active and passive smokers such as lung cancer.

b) A tax on cigarettes will mean an increase in cigarette prices which makes it too expensive for the consumers and thus reducing its consumption. Reduced demand will reduce the negative externalities and thus taxes bring market efficiency.

c) In as much as the cigarette ban will reduce negative externalities, it may bring about a reduction in economic efficiency in that it will reduce profits accruing to a manufacturing company and even loss of employment to those who depended on such companies for a living.