Refer to the graph in Study Problem 4 that shows the market for cigarettes. Suppose the government wants to eliminate inefficiency in this market by imposing a tax on each pack of cigarettes sold.

a. What is the amount of the per-pack tax that would result in the socially optimal quantity of cigarette consumption?

b. A quota can also be used to solve the externality problem. What quantity should the government choose for this quantity cap if its goal is to achieve the socially optimal outcome?

c. Why isn’t the socially optimal quantity of cigarettes zero?

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Price of cigarettes $10 $8 $7 1 1 1 I 1 1 I 1 120 Marginal social cost Marginal private cost Demand 180 Quantity of cigarettes (millions of packs)