Assume that the daily demand for packs of cigarettes in the tobacco-addicted nation of Pcoria is Q = 100 − P Further assume that the marginal cost of producing a pack of cigarettes is §6, and that the market for cigarettes is perfectly competitive. Assume that each pack of cigarettes smoked does §6 worth of health damage to the smoker in the form of increased cancer risk and a total of § 5 worth of health damage to the smoker’s neighbors via secondhand smoke. Finally, assume that all Pcorian cigarette consumers are aware of these costs.

a. Assume that a Pcorian smoker named Jay states that he is willing to buy a pack of cigarettes for §8, but not a penny more. In this market, where the price is § 6 per pack, what are the private benefits and private costs incurred whenever he buys a pack of cigarettes? Is it privately efficient for him to buy a pack of cigarettes at this price?

b. What about the public benefits and public costs? Is it socially efficient for him to buy a pack of cigarettes at this price?

c. Suppose that, due to the introduction of a hyper-effective tobacco fertilizer, the cost of producing a pack of cigarettes plummets to §1. Now is it socially efficient for Jay to purchase a pack of cigarettes?