here are two brands of cigarettes X, Y. The demand for each is as follows: Qx = 80 - 2p Qy = 60 - 0.5p Assume that the marginal cost of producing cigarette X is $10, the marginal cost of producing cigarette Y is $8, and that the market for both cigarettes is perfectly competitive. Assume that each pack of cigarette X smoked does $5 worth of health damage to the smoker, and a total of $4 worth of health damage to the smoker’s neighbors via second-hand smoke. Each pack of cigarette Y smoked does $6 worth of health damage to the smoker, and $5 health damage to the smoker’s neighbors. (a) Explain why the public supply curves differ from the private supply curves, and how this represents the externality from second-hand smoke. Highlight the area(s) of your diagram that represents a social loss. (b) Calculate the social loss for both. (c) Suppose the government decides to pursue a Pigouvian solution to eliminate social loss. What's amount of tax or subsidy would the government implement? What's the resulting quantity of demand for both cigarettes.
1. There are two brands of cigarettes X, Y. The demand for each is as follows: Qx = 80 - 2p Qy = 60 - 0.5p
Assume that the marginal cost of producing cigarette X is $10, the marginal cost of producing cigarette Y is $8, and that the market for both cigarettes is
(a) Explain why the public supply curves differ from the private supply curves, and how this represents the externality from second-hand smoke. Highlight the area(s) of your diagram that represents a social loss.
(b) Calculate the social loss for both.
(c) Suppose the government decides to pursue a Pigouvian solution to eliminate social loss. What's amount of tax or subsidy would the government implement? What's the resulting quantity of demand for both cigarettes.
(d) Besides the Pigouvian solution, what else solution do you have? What are the conditions in order to successfully implement this?
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 2 images
