Suppose that smoking creates a negative externality. If the government does not interfere in the cigarette market, then
A)the equilibrium quantity of cigarettes smoked will equal the socially optimal quantity of cigarettes smoked.
B)the equilibrium quantity of cigarettes smoked will be greater than the socially optimal quantity of cigarettes smoked.
C)the equilibrium quantity of cigarettes smoked will be less than the socially optimal quantity of cigarettes smoked.
D)There is not enough information to answer the question.

Question

Quizplus · Accepted Answer

Without government intervention, the market will only consider the private cost of smoking and not the external cost imposed on others. Therefore, the equilibrium quantity will be at a point where the private marginal benefit equals the private marginal cost. However, this quantity will be greater than the socially optimal quantity because the external cost is not considered. Hence, there will be an overconsumption of cigarettes.

Suppose That Smoking Creates a Negative Externality