e. Without intervention in this market, what is the deadweight loss that arises as a result of the externality? Locate the area on the graph and calculate the dollar value. 2$ million f. If the government wants to use a Pigovian tax to internalize the externality and bring the market to the socially optimal quantity, what would the amount of the tax need to be in order to eliminate the deadweight loss?
e. Without intervention in this market, what is the deadweight loss that arises as a result of the externality? Locate the area on the graph and calculate the dollar value. 2$ million f. If the government wants to use a Pigovian tax to internalize the externality and bring the market to the socially optimal quantity, what would the amount of the tax need to be in order to eliminate the deadweight loss?
Economics (MindTap Course List)
13th Edition
ISBN:9781337617383
Author:Roger A. Arnold
Publisher:Roger A. Arnold
Chapter30: Market Failure: Externalities, Public Goods, And Asymmetric Information
Section: Chapter Questions
Problem 8QP
Related questions
Question
Please answer parts e and f below.
Transcribed Image Text:e. Without intervention in this market, what is the deadweight loss that arises as a result of
the externality? Locate the area on the graph and calculate the dollar value.
$
million
f. If the government wants to use a Pigovian tax to internalize the externality and bring the
market to the socially optimal quantity, what would the amount of the tax need to be in
order to eliminate the deadweight loss?
per pack
Transcribed Image Text:Problem 1: Externality
The weekly supply and demand for packs of cigarettes in the United States is given in the
figure below. Suppose cigarette smoking causes an external cost on nonsmokers, as shown
by the social benefit curve on the graph.
Price ($)
36
34
32
30
28 -
26
24
22
S=MC
=MC
pvt
20 -
18
16 -
14 -
12-
10-
8
6-
4 -
2
MB
MB
pvt
2
6 8
10 12 14 16 18 20 22 24 26 28 30 32
Pack of cigarettes (millions)
a. This is a negative
consumption
v externality.
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