Suppose that cigarette smokers create a negative externality. Further suppose that the government imposes a tax on cigarettes equal to the per-unit externality. What is the relationship between the after-tax equilibrium quantity and the socially optimal quantity of cigarettes?
A)They are equal.
B)The after-tax equilibrium quantity is greater than the socially optimal quantity.
C)The after-tax equilibrium quantity is less than the socially optimal quantity.
D)There is not enough information to answer the question.

Question

Quizplus · Accepted Answer

The tax internalizes the externality, aligning the private cost with the social cost, thus making the after-tax equilibrium quantity equal to the socially optimal quantity.

Suppose That Cigarette Smokers Create a Negative Externality