5. The Role of Government: Quota - Quantity Regulation Smoking imposeshealth risks to others and generates negative demand-side externalities. Thefollowing 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)XPacks ofcigarettes (Q)b. Suppose that the government is to impose a quota on cigarette production tocorrect the externality. Using the diagram, indicate the quota, consumer surplusand producer surplus from the quota regulation.Price per Pack (P)Packs ofcigarettes (Q)(c) Please discuss different impacts of quota regulation and excise tax to correctthe externality of smoking. Be sure to discuss their effects on consumer surplus,producer surplus, and government revenue. Which type of regulation will theproducers prefer, quota or exercise tax? Why?

An externality, in economics, refers to a side effect or consequence of an economic activity that…

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,

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,

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

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Chapter1: Making Economics Decisions

Section: Chapter Questions

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Question

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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Step 1: Define Externality

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