Smoking produces a negative externality because it imposes a health risk on others who

Chapter 0, Problem 6

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Smoking produces a negative externality because it imposes a health risk on others who inhale second-hand smoke. Cigarette smoking also causes productivity losses to the economy due to the shorter expected life span of a smoker. The U.S. Centers for Disease Control (CDC) has estimated the average social cost of smoking a single pack of cigarettes for different states by taking these negative externalities into account. The accompanying table provides the price of cigarettes and the estimated average social cost of smoking in five states.a. At the current level of consumption, what is the optimal retail price of a pack of cigarettes in the different states? Is the current price below or above this optimal price? Does this suggest that the current level of consumption is too high or too low? Explain your answer. b.In order to deal with negative externalities, state governments currently impose excise taxes on cigarettes. Are current taxes set at the optimal level? Justify your answer. c. What is the correct size of an additional Pigouvian tax on cigarette sales in the different states if the CDCs estimate for smoking cost does not change with an increase in the retail price of cigarettes?

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