The graph below illustrates a market for cigarettes. Use it to answer the questions that follow

The graph below illustrates a market for cigarettes. Use it to answer the questions that follow

The correct answer and explanation is:

I’ll start by analyzing the graph and then answer the related questions with a 300-word explanation. After that, I’ll generate an appropriate image. Let me proceed with the analysis.

Analysis of the Cigarette Market Graph

The graph illustrates the market for cigarettes by showing the demand curve, the marginal private cost (MPC), and the marginal social cost (MSC). Here’s what the key elements represent:

• Demand Curve (Blue Line): Shows the relationship between the price of cigarettes and the quantity demanded.
• Marginal Private Cost (Red Line): Represents the cost incurred by cigarette producers for producing each additional unit.
• Marginal Social Cost (Purple Line): Reflects the total cost to society, including externalities like healthcare costs and second-hand smoke effects.

Key Observations:

1. The market equilibrium (where demand meets marginal private cost) occurs at 180 million packs at a price of $8.
2. The socially optimal equilibrium (where demand meets marginal social cost) occurs at 120 million packs at a price of $10.
3. The difference between marginal social cost and marginal private cost indicates a negative externality—the external cost borne by society, such as health issues caused by smoking.

Answers to Key Questions

1. What is the market quantity and price of cigarettes without government intervention?
   • The market equilibrium price is $8 per pack.
   • The quantity demanded is 180 million packs.
2. What is the socially optimal quantity and price?
   • The socially optimal price is $10 per pack.
   • The optimal quantity is 120 million packs.
3. Why is there a difference between private and social cost?
   • The difference is due to negative externalities like healthcare costs, environmental damage, and second-hand smoking effects, which are not accounted for by the private market.
4. What policy can the government use to correct the externality?
   • The government can impose a tax of $2 per pack, shifting the marginal private cost to align with the marginal social cost, reducing consumption to the socially optimal level.

Now, I’ll generate an image representing these concepts.

Here is the generated economic graph illustrating the cigarette market, showing the demand, marginal private cost, and marginal social cost curves. Let me know if you need any modifications or further explanations!