Question I Imagine that there are two people in one room - Mary and Jane. Mary i
ID: 2788914 • Letter: Q
Question
Question I
Imagine that there are two people in one room - Mary and Jane. Mary is smoking cigarettes.
The table below shows Mary's Marginal Private Benefits (MPBLA) and Marginal Private Costs
(MPCI,A) of smoking each additional cigarette, as well as Marginal Damages (MDJ) to Jane
from each additional cigarette: (30)
a) How many cigarate is Mary going to smoke? Explain.
b) What is the socially optimal number of cigarettes? Explain.
c) What is the net welfare benefit to society from moving from output in part (a) to socially
optimal output in part (b)?
d) Suggest a Pigouvian tax that would induce Mary to smoke socially optimal number of
cigarettes?
e) Suppose that property rights to the air in the room were assigned to Jane. Do you think
that Coase Theorem could be applied here? Explain.
f) Do you think it makes sense to ban smoking in this room altogether? Explain.
Expert Answer
Number of cigarettes smoked MPBM MPCM MDJ 1 14 5 5.5 2 12 6 6 3 10 7 6.5 4 8 8 7 5 6 9 7.5 6 4 10 8 7 2 11 8.5Explanation / Answer
a) Mary will not smoke more than 4 cigarettes, as after 4th cigarettes the marginal cost of smoking one more cigarrettes is more than the potential banifit.
b) Socially optimal number is 2. As after 2 cigerrettes, the cost for Mary and jane combines is equal to the benift of sociaty(here only for Mary)(both would be 12)
c) Net welfare benefit for
1st cig = 14 - 5 - 5.5 = 3.5
2nd cig = 12 - 6 - 6 = 0
3rd cig = 10 - 7 - 6.5 = -3.5
4th cig = 8 - 8 - 7 = -7
Net benift of Society from smoking 4 cig = 3.5 + 0 -3.5 - 7 = -7
Net benift of Society from smoking 2 cig = 3.5 + 0 = 3.5
Increasing in benifit from moving to 2 cig from 4 = 3.5 - (-7) = 10
d) Pigouvian tax should be 6, as it will result in Mary smoking on 2 cig(socially optimal number)
1st cig = 14 - 5 - 6(tax) = 3
2nd cig = 12 - 6 - 6(tax) = 0
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