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. 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?
Assume that the daily
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
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.
- 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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