Question

Identify and explain the externality associated with the consumption of cigarettes? b) Draw a fully labelled diagram illustrating how the externality identified in part (a) above can be corrected from society’s point of view. c) The Australian government is considering running advertising campaigns to stop or a least slow down the purchase of cigarettes. What is the opportunity cost for the Australian Government if it chooses to do this? How does rational decision making help a government decide how much money to allocate towards this advertising campaign? d) Are community swimming pools a public good? Briefly explain why or why not. Based on your answer, why does the government provide this service?

Answer 1

a)Cigarettes are harmful because they produce a negative externality towards the society.Consumption of cigarettes has a spillover effect on the society but no one pays compensation for this.Consumption of cigarettes has greater  effect on the consumer than  on the society and thus  the marginal benefit  on the consumer is more than on the society.So the industry producing cigarettes achieves allocative inefficiency .This negative externality of cigarette consumption causes health issues for the consumer and more negative effects for the society.

b)The negative externality can be corrected by taxing those who create negative externality which is known as 'making the polluter pay'.With the introduction of the tax,the cost of production or consumption increases , and reduces the demand of the good ie cigarette here and causes negative externality , and also the output .

c)The Australian government makes huge revenue from the cigarette industry and so the opportunity cost of the government in trying to stop the purchase is giving up or foregoing large amount of revenue.The Australian government collects about 8 billion dollars from excise on cigarettes .Advertising campaigns on TV are very expensive in Australia as compared to the world By taxing smoking heavily, the government of Australia tries to balance its budget.

Anti smoking campaigns on television are very effective in reducing smoking .Government anti smoking campaigns cost $480 per quitter in US . Australian government expenditure on anti smoking campaign was $36 million in 2010-11 and $31 million in 2012-13.

d)A public good is a good which can be used by everyone and one person's use does not reduce the amount available for others . It is non excludable and non rivalrous.eg pulic parks..A community swimming pool is public good.It can be used by everyone and is provided by a non profit organization.It is non excludable and non rivalrous.The government provides such service so that everyone can enjoy them without spending more.