Question

Show the market for cigarettes in equilibrium,

assuming that there are no laws banning smoking in

public. Label the equilibrium private market price and

quantity as Pm and Qm. Add whatever is needed to the

model to show the impact of the negative externality

from second-hand smoking. (Hint: In this case it is the

consumers, not the sellers, who are creating the negative

externality.) Label the social optimal output and price as

Pe and Qe. On the graph, shade in the deadweight loss at

the market output.

Short answer

Externality refers to costs that are borne by a third party. Smoking has an effect on people's health in this scenario.

Step-by-step solution

Step 1. Introduction

Externality refers to costs that are borne by a third party. Smoking has an effect on people's health in this scenario.

Step 2. Explanation

The graph of externality is depicted below, with $Pm$and $Qm$signifying the equilibrium price and quantity, respectively. When externalities are taken into account, supply falls and moves to the left, leaving $Qe$and $Pe$as the new socially optimal production and price.