Suppose That Cigarette Smokers Create a Negative Externality

question 6

Multiple Choice

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.

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Definitions:

Useful Life

The estimated duration an asset is expected to be functional and economically useful for its intended purpose.

Residual Value

The anticipated worth of an asset at the conclusion of its lifespan, once depreciation has been accounted for.

Useful Life

The estimated period over which a fixed asset is expected to be useful for the purpose it was acquired by a company.

Net Present Values

A method used in capital budgeting to evaluate the profitability of an investment, calculated by subtracting the initial investment from the present value of future cash flows.