ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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Assume that the daily demand for packs of cigarettes in the

tobacco-addicted nation of Pcorian is

Q=100−P

Further assume that the marginal cost of producing a pack of cigarettes is §6, and that

the market for cigarettes is perfectly competitive. Assume that each pack of cigarettes

smoked does §6 worth of health damage to the smoker in the form of increased cancer

risk and a total of §5 worth of health damage to the smoker’s neighbors via secondhand

smoke. Finally, assume that all Pcorian cigarette consumers are aware of these costs.

  1. Suppose the government decides to pursue a Pigouvian solution to eliminate social

loss. What sort of tax or subsidy would they implement, and what is the resulting

quantity of cigarette packs purchased?

 

2. The opposition party in the Pcorian parliament loudly opposes the proposed tax

plan as government meddling. The opposition leader invokes the Coase theorem

and says that the socially efficient level of smoking will occur even in the absence of

government intervention. How are property rights assigned in this instance? Why

might the Coase theorem not apply in this setting?

3. Assume that the Coase theorem actually does apply in this setting. The Pcorian

parliament passes a new law giving anyone the right to forbid his neighbor from

smoking. Who benefits, and who is harmed, by this new law? How will this affect

the level of smoking?

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