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Question: 4 10 the pigouvian approach to externalities the following diagram...

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4. (10) The Pigouvian Approach to Externalities The following diagram displays a negative consumption externality, smoking. Note that, in contrast to the treatment of a negative production externality, the negative consumption externality is treated as causing a divergence between the marginal private benefit (MPB) of a cigarette and its marginal social benefit (MSB). The price on the y- axis is the consumer price. Assume that there are no production externalities, MSC MPC, and that S-$-S. Recall that the cigarette industry supply curve is its MPC curve. MSB MPB a) (2) In what units is deadweight loss measured? b) (2) Using the diagram, illustrate the Pigouvian policy that would be applied to deal with the negative consumption externality c) (2) Give the rationale for the Pigouvian policy d) (2) Indicate one weakness of the Pigouvian policy e) (2) The way the diagram is drawn assumes that the difference between MPB and MSB is independent of q. What is the economic interpretation of this assumption?

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