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You are in charge of study the tobacco industry and its effects on the society wellbeing. To tackle that, the team of environmental economists (you included, of course) decided to approach this with the theory of externalities, (Recall, tobacco is a good that provokes a negative externality in society) and divide the project in 2 steps:
Step 1: The first step is to find the market equilibrium of the industry so a competitive equilibrium is found using the following functions:
Demand = Marginal Private Benefit (MPB) = 30 – 0.5Q
Supply = Marginal Private Cost = -1.5 + 0.4Q
Step 2: Through the team’s research and literature, you have found that the negative externality of smoking to society accounts for 60% of the total amount (quantity) of cigarettes in the market (Marginal External Cost (MEC) = 0.6Q).
At competitive equilibrium, Marginal Private Benefit (MPB) = Marginal Private Cost (MPC) or Supply = Demand
1: Find the competitive equilibrium Quantity and Price.
At efficient equilibrium Marginal Social Benefit (MSB) = Marginal Social Cost (MSC)
2: Find the efficient equilibrium.
Recall (MSC=MEC+MPC), we are assuming the Marginal External Benefits are nonexistent (MEB=0)
3: Contrast the market conditions in both cases. For example, including externalities does the supply increase or decrease? Do prices go up or down? Please be specific and show all your work.
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