Question

3. Externalities Medical research has shown the negative health effects of “secondhand” smoke. If you are a smoker and you wish to continue smoking, describe the effect of the following legislative proposals on your behavior. As a result of these programs, do you benefit? Does society as a whole benefit? Please restrict your analysis/ arguments to economic terms. Graphs are not needed.

a. A bill is proposed that would lower tar and nicotine levels in all cigarettes. b. A tax is levied on each pack of cigarettes (i.e. tax on the producers). c. A tax is levied on each pack of cigarettes sold (i.e. tax on the consumers). d. Smokers would be required to carry government-issued smoking permits at all times.

Answer 1

a) Bill won't be good for me because I will get less benefit for each dollar spent on cigarette. However society will benefit because Marginal damage to the soicety will be reduced.

b) Tax will make me worse off because with tax price of cigarette will increase. High price means less consumption and thus less utility. However soicety will benefit less consumption means less smoke and thus less damage to soicety.

c) Still i am worse off because a part of tax will be shared by buyer and hence increase in price of cigarette. Less consumption means less utility. Sellers of cigarette will be worse off as thus will lead to lower profit. Non sellers will benefit due to less pollution more utility in fresh air .

d) I am worse off because less utility due to increased transaction cost of purchasing and carrying non smoking permits.

Soicety will be benefited because with permits they have right to free air.