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:

Leveraged Buyouts

Acquisition of a company using a significant amount of borrowed money (debt) to meet the cost of acquisition.

Proxy Contests

Attempts to gain control of a firm by soliciting a sufficient number of shareholder votes to replace existing management.

Incremental Gain

The additional benefit or profit received from making a change or taking a new action.