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:

Trade Practices

Refers to the methods, operations, and conduct of a business or trade, including advertising, marketing, and selling of goods and services, often subject to regulation to ensure fairness and competition.

Regulation

Rules or directives made and maintained by an authority to manage or govern behavior within its jurisdiction, typically aiming at ensuring fairness, safety, or standards.

Subrogation

The substitution of parties whereby the party substituted acquires the rights at law of the other party, usually by way of contractual arrangement.

Negligence

The failure to exercise the standard of care that a reasonably prudent person would have exercised in a similar situation, resulting in harm or damage.