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Cigarette: Marginal Social Cost Or Sacrifice?

Satisfactory Essays

The above graph shows that at the original price level(P), the marginal private benefit(MPB) of cigarette is greater than the marginal social cost (MSC). This means that cigarette is over-consumed and the green triangle between MSB and MPB shows the welfare loss. The government may decide to increase the indirect tax to cigarette as the cost of cigarette(healthcare) outstrip the taxation it collects. The supply curve shifts to the left from S=MPC=MSC to S+tax. The quantity consumed will decreases from Q to Q1 and the problem of over-consumed will be solved as the yellow triangle that represents the decrease in consumption is equal to the original welfare loss triangle.

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