Question

This is a written assignment that you must conduct exploratory research on how the government internalizes negative externality (you only need one market or one product or one activity).

Recall negative externalities occur in many markets; for example, oil production, manufacturing, transportation, and smoking, etc.

Please make sure that:

1. You clearly identify the market (product or activity) that causes negative externalities, which means the negative externalities must be also well defined. These could be shown with good statistics and proper in-text citations (and references.) At least two citations in APA formatting style.

Answer 1

Cigarettes are a demerit good that is a product that is over-provided by the industry and it is harmful to society to consume this good. Cigarettes are harmful to society because they bring about a negative externality. That is because cigarette consumption has a spillover effect on third parties and no fee will be paid by anyone. The effects of smoking tobacco have a greater effect on the consumer than on culture. So, for the consumer, the marginal benefit is greater than for society. Which results in the industry producing the cigarettes suffering an allocative inefficiency. This negative externality generated by the consumption of cigarettes causes major health problems for the consumer and greater adverse effects for society. This externality was much greater before the government's ban on advertising was set in 1970. Without the ban, the average cigarette price was lower, resulting in higher cigarette consumption , higher consumer surplus, and lower producer surplus. Upon enactment of the government restriction, prices increased resulting in a negative change in the total surplus. This meant government intervention has been successful in reducing the negative impact of externality on society.

Addictive conduct may keep purchasers from settling on sane decisions. On the off chance of shoppers choosing to smoke (that is, not acting in their long-term wellbeing) a market disappointment may occur. Habit is described by the propensity that past utilization raises present utilization in light of the fact that past utilization of the substance raises the minor utility of present utilization. In such cases an extension in past use of the great triggers an increase in current use. An benefit of smoking to a dependent smoker is avoiding nicotine withdrawal. Past utilization will generally energize present use in this manner.

Economic theory had generally demonstrated compulsion as an arrangement of propensity until the mid-1980's. Consumers who are addicted were seen as nearsighted. It was acknowledged that present use creates future use and users ignored the impacts of existing usage on future government assistance. The use of addictive products has been seen as completely lethargic to changes in value. Subsequently, as per Chalpouka and Warner 's study in 2001, addictive behavior was seen as stupid and did not fit with standard economics.

Today's expansion in utilization further expands the addictive stock. Later in the light of the fact that smoking is destructive, a high addictive stock brings down the normal utility of smokers. Be that as it may, a higher addictive stock also builds the peripheral utility that someone who is addicted gets from smoking. That is, the higher the stock of addictions, the more the addicted person hungers for another cigarette. The key part of any model of compulsion is the way addicts handle this intertemporal question.

Addicts are forward-looking since current use is based on past and future use. As forward-looking buyers, smokers exchange additions from smoking off the utilities against the expenses of doing as such. Smokers infer usefulness from joy, status within their social gathering and so on. Costs considered by smokers are the financial cost of cigarettes, the current harm they 're doing to themselves through smoking, and the extra future harm caused by advancing future use. Markdown of the future utility and expenses of these judicious addicts exponentially and thus have time-predictable inclinations.

Their relative inclination to prosperity over a later date at a prior date is believed to be the equivalent for any point in time. Limiting future net utility with progressively far-off impacts gaining less weight, addicts appear from smoking at either a positive or a negative net utility and act reasonably in their current smoking choices as needs are. The use of addictive products is administered as different goods according to the equivalent sane dynamic procedure. Smokers are fully aware of the ability to become dependent when they settle on their smoking choices along these lines.

Social costs are divided into internal costs borne by smokers, and external costs borne by others with the former a suitable tax candidate. Different social cost-of-smoking studies included direct costs, consisting of health care costs associated with all smoking-related diseases, indirect costs capturing the value of smoking-related loss of human capital and intangible costs capturing the value of life lost due to smoking-related death or disease

To properly assess the efficient tax rate on cigarettes, three essential criteria must be fulfilled for social cost-of-smoking studies.

First, smoking costs need to be measured using an incidence-based methodology, which calculates the current value of the increased lifetime costs of current smoker cohorts. The incidence-based model reflects the long lags between the initiation of smoking and most illnesses associated with smoking.

Second, there has to be a distinction between external costs and internal costs. In addition, the additional benefits of cigarettes over their lifespan must be offset against the savings resulting from premature death from smoking. While savings from government transfers due to premature death may not mean that there is a social benefit from premature death, the government, as a provider of such services, may experience financial savings from premature death, which must be considered in deciding how smoking causes different parties to fare.

Third, in isolating the effect of smoking, other attributes of individuals than smoking that affect external costs, such as education , income and other health habits, should be statistically controlled for.

Excessive smoker's clinical expenses are seen as external costs. These expenses include those borne by and large-scale funded human services programs, expanded expenditure on all in all funded incapacity protections, installments paid by workers in all funded programs while missing, for example, government disability, demise profits from bunch-life protection due to increased mortality, predestined wage charges paid to fund retirement and general well-being

The effective tax level depends on whether addicts are very intelligent or inexperienced, that is to say, the degree to which addicts are conscious that they make smoking choices that are inconsistent in time. To the naã¯ve the tax is higher as it acts as a self-control tool and a way to fix the issue of misperception regarding their potential behaviour.

Smoking cigarettes induces business deficiencies that hinder effective resource distribution and social welfare maximisation. The successful excise tax rate for cigarettes depends on the approach taken to understand smoking decisions in relation to addictive behaviour.