Suppose That Smoking Creates a Negative Externality

question 184

Multiple Choice

Suppose that smoking creates a negative externality. If the government imposes a per-cigarette tax equal to the per-cigarette externality, then

• A)the after-tax equilibrium quantity of cigarettes smoked will be less than the socially optimal quantity of cigarettes smoked.
• B)the after-tax equilibrium quantity of cigarettes smoked will be greater than the socially optimal quantity of cigarettes smoked.
• C)the after-tax equilibrium quantity of cigarettes smoked will equal the socially optimal quantity of cigarettes smoked.
• D)There is not enough information to answer the question.

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Definitions:

Forward Contract

A personalized deal between two counterparties to execute the sale or purchase of an asset at a set price on a future date agreed upon.

Fair Value

An estimate of the market value of an asset or liability; it is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Exchange Rates

The value of one currency for the purpose of conversion to another, determining how much one country's currency is worth in another country's currency.

Two-Transaction Perspective

An approach in accounting that views a transaction involving foreign currencies as two separate events: one for the initial transaction and another for the currency exchange.