Question

Question 2

The links between tobacco smoking, passive smoking and lung cancerare well established.

1. What are the features of tobacco smoke that imposes externalities?

2. Explain whether these are:

1. positive or negative externalities? (1/2 mark)
2. production or consumption externalities (1/2 mark)

3. In a supply and demand diagram show the deadweight loss associated with tobacco smoke under a scenario where there are externalities

Answer 1

Externality is one of the sources of market failure. It is the uncompensated impact of an action on the well being of a bystander. It can be of two types: positive externality and negative externality. If the associated social benefit (cost) is more than the private benefit (cost) then it is known as positive externality (negative externality).