Suppose that smoking creates a negative externality.What can the government do to equate the equilibrium quantity of cigarettes and the socially optimal quantity of cigarettes smoked?
A)impose a tax on cigarettes that is equal to the per-unit externality
B)offer a subsidy on cigarettes that is equal to the per-unit externality
C)impose a regulation limiting the number of cigarettes that each consumer can purchase
D)nothing

Question

Quizplus · Accepted Answer

By imposing a tax on cigarettes that is equal to the per-unit externality, the government can increase the price of cigarettes and reduce the quantity of cigarettes demanded. This will lead to a movement along the demand curve and will decrease smoker's willingness to pay for cigarettes. The tax will shift the supply curve to the left, reflecting the higher cost of production due to the externality. This will result in a higher price and a lower quantity of cigarettes produced and consumed, eventually reaching the socially optimal quantity of cigarettes. A subsidy (B) or a purchase limit (C) would increase the quantity of cigarettes consumed, which is not desired when dealing with negative externalities. Doing nothing (D) would allow the market to continue producing an inefficient outcome.

Suppose That Smoking Creates a Negative Externality