Assume the market demand for cigarettes is as follows e(per pack) cks per day) 1

Question

Assume the market demand for cigarettes is as follows e(per pack) cks per day) 100 90 80 0 60 50 40 30 20 Suppose that smoking increases external costs valued at 50 cents per pack. If a tax of $1 per pack is imposed to a $3 market price, (a) How many packs will be consumed?packs per day (b) Is this rate too high, too low, or the socially optimal rate of consumption? #7 using chart above Suppose that smoking increases external costs valued at 50 cents per pack. If a tax of $1 per pack is imposed to a SI market price. (a) How many packs will be consumed? packs per day (b) Is this rate too high, too low, or the socially optimal rate of consumption?

Explanation / Answer

6. Market price is $3 and if $1 tax is imposed, effective price will be $4. At $4 price, the quantity is 40 packs.

(a) 40 packs will be consumed.

(b) Private cost = $3 ans external cost = $0.5. So, social cost = $3 + $0.5 = $3.5. So, socially optimal price is $3.5. At this price, the consumption is 50 units. So, socially optimal consumption is 50 units. However, only 40 units are being consumed.

So, the rate is too high.

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