5. The Role of Government: Quota - Quantity Regulation Smoking imposes health risks to others and generates negative demand-side externalities. The following diagram describes the market for cigarettes. (a) In the diagram, identify the lines that express the Marginal Social Cost,

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5. The Role of Government: Quota - Quantity Regulation Smoking imposes
health risks to others and generates negative demand-side externalities. The
following diagram describes the market for cigarettes.
(a) In the diagram, identify the lines that express the Marginal Social Cost,
Marginal Private Cost, Marginal Private Benefit, and Marginal Social Benefit;
briefly explain. [
Price per Pack (P)
X
Packs of
cigarettes (Q)
b. Suppose that the government is to impose a quota on cigarette production to
correct the externality. Using the diagram, indicate the quota, consumer surplus
and producer surplus from the quota regulation.
Price per Pack (P)
Packs of
cigarettes (Q)
(c) Please discuss different impacts of quota regulation and excise tax to correct
the externality of smoking. Be sure to discuss their effects on consumer surplus,
producer surplus, and government revenue. Which type of regulation will the
producers prefer, quota or exercise tax? Why?
Transcribed Image Text:5. The Role of Government: Quota - Quantity Regulation Smoking imposes health risks to others and generates negative demand-side externalities. The following diagram describes the market for cigarettes. (a) In the diagram, identify the lines that express the Marginal Social Cost, Marginal Private Cost, Marginal Private Benefit, and Marginal Social Benefit; briefly explain. [ Price per Pack (P) X Packs of cigarettes (Q) b. Suppose that the government is to impose a quota on cigarette production to correct the externality. Using the diagram, indicate the quota, consumer surplus and producer surplus from the quota regulation. Price per Pack (P) Packs of cigarettes (Q) (c) Please discuss different impacts of quota regulation and excise tax to correct the externality of smoking. Be sure to discuss their effects on consumer surplus, producer surplus, and government revenue. Which type of regulation will the producers prefer, quota or exercise tax? Why?
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