Show the market for cigarettes in equilibrium, assuming that there are no laws banning smoking in public. Label the equilibrium private market price and quantity as Pm and Qm. Add whatever is needed to the model to show the impact of the negative externality from second-hand smoking. (Hint: In this case it is the consumers, not the sellers, who are creating the negative externality.) Label the social optimal output and price as Pe and Qe. On the graph, shade in the deadweight loss at the market output.

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Asked Mar 11, 2020
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Show the market for cigarettes in equilibrium, assuming that there are no laws banning smoking in public. Label the equilibrium private market price and quantity as Pm and Qm. Add whatever is needed to the model to show the impact of the negative externality from second-hand smoking. (Hint: In this case it is the consumers, not the sellers, who are creating the negative externality.) Label the social optimal output and price as Pe and Qe. On the graph, shade in the deadweight loss at the market output.

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Expert Answer

Step 1

The market equilibrium is obtained at the intersection of the demand curve and the supply curve. In the case of the unregulated market for cigarettes, the demand and supply would determine the equilibrium price for cigarettes and the number of cigarettes. This can be illustrated as follows:

Economics homework question answer, step 1, image 1

Step 2

The externalities are the additional costs or benefits incurred to a third person who is not directly involved in the activity. In this case, the consumers are the one who creates the externality and it is negative externality created due to the unregulated market for cigarettes.  When the externality is included in the graph, the supply curve would shift towards the left because the externalities...

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