Imagine that there are two people in one room - Mary and Jane. Mary is smoking cigarettes. The table below shows Mary's Marginal Private Benefits (MPBM) and Marginal Private Costs (MPCM) of smoking each additional cigarette, as well as Marginal Damages (MDJ) to Jane from each additional cigarette: Number of cigarettes smoked MPBM MPCM MDJ 1 14 5 5.5 2 12 6 6 3 10 7 6.5 7 5 6 9 7.5 6 7 4 10 8 2 11 8.5 ப a) How many Cigarate is Mary going to smoke? Explain. b) What is the socially optimal number of cigarettes? Explain. c) Suggest a Pigouvian tax that would induce Mary to smoke socially optimal number of cigarettes? d) Do you think it makes sense to ban smoking in this room altogether? Explain.

Principles of Microeconomics
7th Edition
ISBN:9781305156050
Author:N. Gregory Mankiw
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Chapter10: Externalities
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Imagine that there are two people in one room - Mary and Jane. Mary is smoking cigarettes. The
table below shows Mary's Marginal Private Benefits (MPBM) and Marginal Private Costs
(MPCM) of smoking each additional cigarette, as well as Marginal Damages (MDJ) to Jane from
each additional cigarette:
Number of cigarettes smoked
MPBM
MPCM
MDJ
1
14
5
5.5
2
12
6
6
3
10
7
6.5
7
5
6
9
7.5
6
7
4
10
8
2
11
8.5
ப
a) How many Cigarate is Mary going to smoke? Explain.
b) What is the socially optimal number of cigarettes? Explain.
c) Suggest a Pigouvian tax that would induce Mary to smoke socially optimal number of
cigarettes?
d) Do you think it makes sense to ban smoking in this room altogether? Explain.
Transcribed Image Text:Imagine that there are two people in one room - Mary and Jane. Mary is smoking cigarettes. The table below shows Mary's Marginal Private Benefits (MPBM) and Marginal Private Costs (MPCM) of smoking each additional cigarette, as well as Marginal Damages (MDJ) to Jane from each additional cigarette: Number of cigarettes smoked MPBM MPCM MDJ 1 14 5 5.5 2 12 6 6 3 10 7 6.5 7 5 6 9 7.5 6 7 4 10 8 2 11 8.5 ப a) How many Cigarate is Mary going to smoke? Explain. b) What is the socially optimal number of cigarettes? Explain. c) Suggest a Pigouvian tax that would induce Mary to smoke socially optimal number of cigarettes? d) Do you think it makes sense to ban smoking in this room altogether? Explain.
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