Refer to the figure below. This diagram represents the tobacco industry. The industry creates
A) positive externalities.
B) negative externalities.
C) no externalities.
D) no equilibrium in the market.

Question

Refer to the figure below. This diagram represents the tobacco industry. The industry creates 
A) positive externalities. 
B) negative externalities. 
C) no externalities. 
D) no equilibrium in the market.

Quizplus · Accepted Answer

The diagram represents negative externalities in the tobacco industry, as there is a difference between private costs (the cost of production for the tobacco companies) and social costs (the cost to society, including health care costs and lost productivity due to smoking-related illnesses). This results in a deadweight loss and a market inefficiency.

Refer to the Figure Below