The surgeon general has determined that smoking causes cancer and heart disease for both smokers and passive smokers, nonsmokers who breathe smoke-filled air. If cigarette prices are determined in a free market, which of the following will be true?

Question

BlackTom AI · Accepted Answer

Because smoking imposes a negative externality (harmful secondhand smoke), the private market price does not reflect the full social cost. 1) Relevant knowledge points and concepts - Externality: a cost or benefit borne by third parties not involved in the transaction. Secondhand smoke is a negative externality. - Marginal private cost (MPC): cost borne by producers/smokers per additional cigarette. - Marginal social cost (MSC): MPC plus external cost imposed on others: MSC = MPC + external cost. - Market equilibrium in a free market equates marginal private benefit (MPB) with MPC, not MSC. - Socially optimal equilibrium equates MPB with MSC. 2) Step-by-step reasoning - In a free market smokers pay price Pm determined where MPB (demand) = MPC (supply). - Because smoking imposes external costs on nonsmokers, MSC > MPC at every quantity. - The socially optimal level Q* solves MPB = MSC, which occurs at a lower quantity than the market quantity Qm. - Therefore Qm (market quantity) > Q* (socially optimal), and Pm (market price) < Psocial (price that would reflect MSC). 3) Calculations / intermediate expressions - MSC = MPC + external cost. - Market condition: MPB = MPC → Qm. - Social condition: MPB = MSC = MPC + external → Q* < Qm. - Thus Qm − Q* > 0 and Psocial − Pm > 0, showing market price is too low and quantity too high. 4) Why the correct answer is correct Because the market ignores external costs, supply reflects only private costs, underpricing cigarettes and leading to overconsumption relative to the social optimum. This creates deadweight loss and inefficiency. 5) Why other options are incorrect - Option B: Incorrect because price is not efficient; it fails to include external costs. - Option C: Markets do not always equate marginal social benefit and cost when externalities exist. - Option D: Price does not reflect marginal social benefit to nonsmokers; nonsmokers suffer costs, not benefits. - Option E: Price understates, not overstates, the social cost imposed on nonsmokers. 6) Conclusion The free-market price will be too low and the quantity sold too high, which matches the provided correct answer.

The surgeon general has determined that smoking causes cancer and heart disease for both smokers and passive smokers, nonsmokers who breathe smoke-filled air. If cigarette prices are determined in a free market, which of the following will be true?单项选择题

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