The surgeon general has determined that smoking causes cancer and heart disease for both smokers and passive smokers, nonsmokers who breathe smoke-filled air. If cigarette prices are determined in a free market, which of the following will be true? aThe price of cigarettes will be too low and the quantity sold will be too high. bThe price of cigarettes will be efficient but the quantity sold will be too high. cThe market will be efficient because markets always equate marginal benefits and marginal costs. dThe price of cigarettes will reflect the marginal social benefit received by nonsmokers.
Question
The surgeon general has determined that smoking causes cancer and heart disease for both smokers and passive smokers, nonsmokers who breathe smoke-filled air. If cigarette prices are determined in a free market, which of the following will be true? aThe price of cigarettes will be too low and the quantity sold will be too high. bThe price of cigarettes will be efficient but the quantity sold will be too high. cThe market will be efficient because markets always equate marginal benefits and marginal costs. dThe price of cigarettes will reflect the marginal social benefit received by nonsmokers.
Solution
The correct answer is a) The price of cigarettes will be too low and the quantity sold will be too high. This is because in a free market, the price of cigarettes does not take into account the negative externalities caused by smoking, such as health problems for both smokers and passive smokers. Therefore, the social cost of smoking is higher than the private cost, leading to overconsumption and a lower price than what would be socially optimal.
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