Assume the market demand for cigarettes is depicted in the t

Assume the market demand for cigarettes is depicted in the table below. (a) If cigarettes are priced at $6 a pack, how many packs will smokers buy? (b) If cigarettes are still priced at $6 a packIf secondhand smoke creates $2 of harm per pack, what is the optimal rate of smoking? (c) How large a tax is needed to achieve this outcome?

Solution

(a) Smokers will demand 10 million packs per year at price of $6 as already shown in the table.

(b)

if second hand smoke creates harm of $2 , it will lead to total cost per pack or optimal price for ciggarettes of $8 that is $6+$2. AT price of $8 , smokers will demand 6 million pack.

(c) $2 tax per pack

now as the govenment need to achieve optimal level of demand, it should impose tax of $2 per pack on current prices of $6 per pack as $8 is the optimal price level.