Question
Consider the market for cigarettes in the city of Springville. It appears that the marginal cost of producing cigarettes is constant at $4/pack. Springville's demand
Consider the market for cigarettes in the city of Springville. It appears that the marginal cost of producing cigarettes is constant at $4/pack. Springville's demand for cigarettes is given by the linear inverse demand function, P=20 Q where Q is quantity consumed in thousands of packs per day.
A recent study by local researchers has shown that second-hand smoke caused by each pack of cigarette consumption adds $1.00 to the total cost of health care in the city for non-smokers. Smokers are not harmed by second-hand smoke. They are assumed to be fully aware of the health costsinflicted on them for their own smoking and that they pay for their own health care.
a) Calculate the equilibrium price and quantity of cigarettes sold in Springville. [1 mark]
b) Using a diagram for the market for cigarettes in Springville, show the deadweight loss that exists due to this negative externality.[2 marks]
c) Identify a government policy that can partially or fully eliminate the deadweight loss. Explain using your diagram. [2 marks]
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started