Question

Suppose that the U.S. government determines that cigarette smoking creates social costs not reflected in the current market price and equilibrium quantity of cigarettes. A study has recommended that the government can correct for the externality effect of cigarette consumption by paying farmers not to plant tobacco used to manufacture cigarettes. It also recommends raising the funds to make these payments by increasing taxes on cigarettes. These actions by the government lead to all the following outcomes, except
A leftward shift of the supply curve of tobacco
A leftward shift of the supply curve of cigarettes
An increase in the negative externality caused by cigarette smoking
A reduction in the negative externality caused by cigarette smoking

Answer 1

Answer:

The correct answer is: An increase in the negative externality caused by cigarette smoking.

Explanation:

If government pays farmers not to plant tobacco this lead to a decrease in tobacco production. This will further cause the supply of a tobacco to decrease. As a result, the supply curve of tobacco will shift leftwards.

A decrease in supply of tobacco will increase its price. As tobacco is used to make cigarettes, the increase in its price will increase the price of producing cigarettes. As a result, the supply of cigarettes will decrease causing a leftward shift in the supply curve of cigarettes.

As the supply decreases, the price of cigarettes will decrease. People will consume less quantity of cigarettes. This will cause a reduction in the negative externality caused by smoking cigarettes.