Question

This is a written assignment that you must conduct exploratory research on how the government internalizes negative externality (you only need one market or one product or one activity).

Recall negative externalities occur in many markets; for example, oil production, manufacturing, transportation, and smoking, etc.

Please make sure that:

You clearly identify the market (product or activity) that causes negative externalities, which means the negative externalities must be also well defined. These could be shown with good statistics and proper in-text citations (and references.)at least 2 citations in APA formatting.

Answer 1

Cigarettes are a demerit good which is a good that is over provided by the market and consumption of this good is harmful to society. Cigarettes are harmful to society because they produce a negative externality. This is because the consumption of cigarettes has a spillover effect on third parties and no compensation is paid by anyone. For cigarettes, the benefit of consuming has a greater effect on the consumer than on society. So, the marginal benefit for the consumer is greater than it is on society. This results in an allocative inefficiency is achieved by the industry producing the cigarettes. This negative externality produced by cigarette consumption causes major health issues for the consumer and greater adverse effects for society. Before the government ban on advertising was set in 1970, this externality was much greater. Without the ban, the average price of cigarettes was lower which caused an increase in cigarette consumption, an increase in consumer surplus and a decrease in producer surplus. When the government was restriction was enacted, prices increased resulting in a negative change in total surplus. This meant that government intervention was successful in reducing the negative externality effect on society.

Addictive conduct may keep purchasers from settling on sane decisions. On the off chance that shoppers are unreasonable in choosing to smoke (that is, not acting in their long-term wellbeing) a market disappointment may happen. Habit is described by the propensity that past utilization raises present utilization in light of the fact that past utilization of the substance raises the minor utility of present utilization. In such cases, an expansion in past utilization of the great prompts an increment in current utilization. To a dependent smoker, one advantage of smoking is to forestall nicotine withdrawal. In this manner, past utilization will in general energize present use.

Until the mid-1980s, economic theory generally demonstrated compulsion as propensity arrangement. Addicted consumers were seen as being nearsighted. It was accepted that present utilization builds future utilization yet that addicts overlooked the impacts of current utilization on future government assistance. The utilization of addictive products was viewed as being totally lethargic to value changes. Subsequently, addictive conduct was seen as silly and didn't fit with regards to standard economics as per study by Chalpouka and Warner in 2001.

An expansion in utilization today expands the addictive stock later on. A high addictive stock brings down the normal utility of smokers later on in light of the fact that smoking is destructive. Be that as it may, a higher addictive stock additionally builds the someone who is addicted's peripheral utility got from smoking. That is, the higher the addictive stock, the more the someone who is addicted hungers for another cigarette. The key part of any compulsion model is the manner by which addicts manage this intertemporal issue.

Addicts are forward-looking since current utilization relies upon past and future utilization. As forward-looking purchasers, smokers exchange off the utility additions from smoking against the expenses of doing as such. Smokers infer utility from joy, status inside their social gathering, etc. Costs that smokers consider are the financial cost of cigarettes, current harm that they are doing to themselves through smoking, and the extra future harm brought about by progressing future utilization. These judicious addicts’ markdown future utility and expenses exponentially and in this way have time-predictable inclinations.

Their relative inclination for prosperity at a prior date over a later date is thought to be the equivalent for any point in time. Limiting future net utility with progressively far off impacts getting less weight, addicts show up at either a positive or a negative net utility from smoking and reasonably act as needs be in their present smoking choices. Utilization of addictive products is administered by the equivalent sane dynamic procedure as different goods. Along these lines, smokers are completely mindful of the capability of turning out to be dependent when they settle on their smoking choices.

Social costs are divided into internal costs borne by smokers and external costs borne by others with the former a candidate for appropriate taxation. Various social cost-of-smoking studies have included direct costs, consisting of health care costs associated with all smoking-related diseases, indirect costs, which capture the value of the loss of human capital due to smoking, and intangible costs, which capture the value of life lost due to smoking-related death or disease

Three essential criteria must be fulfilled for social cost-of-smoking studies to correctly assess the efficient cigarette tax rate.

First, the costs of smoking must be assessed via the incidence-based approach, which determines the present value of the additional lifetime costs of cohorts of present smokers. The incidence-based approach captures the long lags between smoking initiation and most smoking-related illnesses.

Second, external costs must be distinguished from internal costs. Also, smokers’ excess costs during their lifetime must be set off against savings resulting from premature smoking-related death. While savings from government transfers due to premature death do not imply that there is a social gain from premature death, the government, as provider of certain services, will experience financial savings from premature death, which must be considered in determining how different parties fare because of smoking.

Third, other attributes of individuals than smoking that influence external costs, such as education, income, and other health habits, should be statistically controlled for in isolating the effect of smoking.

Inordinate clinical expenses of smokers are viewed as external costs. These expense incorporate those borne by and large financed human services programs, expanded expenses on all in all financed inability protections, installments laborers get from all in all financed programs while missing, for example government disability, demise profits by bunch life protections because of expanded mortality, predestined charges paid on wages to fund retirement and general wellbeing programs due to unexpected passing, and all property harm from smoking-related flames paid by consistently financed fire protection.

The efficient tax level depends on whether addicts are rather sophisticated or naive, that is, the degree to which addicts are aware that they make time-inconsistent smoking decisions. The tax is higher for the naive because it serves as a self-control device and a way to correct the misperception problem concerning their future behavior.

Cigarette smoking causes market failures that prevent the efficient allocation of resources and the maximization of social welfare. The efficient cigarette excise tax rate depends on the approach taken towards viewing smoking decisions in the context of addictive behavior