Question

If cigarette smoking creates a negative consumption externality, then the free market equilibrium quantity will be...

If cigarette smoking creates a negative consumption externality, then the free market equilibrium quantity will be __________ than the socially efficient quantity because ___________.

Larger; the free market equilibrium maximizes total surplus

Smaller; the harm smokers do to society will reduce demand for cigarettes

Larger; cigarette smokers do not internalize the negative effect they have on others

Smaller; cigarette smokers do not internalize the negative effect they have on others
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Answer #1

Larger, the free market equilibrium maximizes total surplus.

In a free market, the total demand and supply is determined by the agreement of consumers and producers . If there is a free market equilibrium in a negative consumption externality, then the free market equilibrium quantity will be Larger and cigarette smokers do not internalize the negative effect they have on others.

Option c.

Other options are incorrect because govt intervention is minimal in a free market ideally.so no internalisation by the smoker would take place here as no higher taxes is being levied on cigarettes and it's consumption.

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