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Passive smoke is an example of a negative externality
Passive smoke is an example of a negative externality. To reduce this negative externality, the government should
A. grant subsidies to tobacco companies and encourage more cigarette production.
B. grant subsidies to tobacco companies and discourage more cigarette production.
C. reduce taxes on cigarettes and encourage more cigarette production.
D. impose taxes on cigarettes and encourage less cigarette production.
E. ban the production of cigarettes and other tobacco-related goods.
Expert Solution
- The correct option is (D). Impose taxes on cigarettes and encourage less cigarette production.
Here, it is given that passive smoke creates negative externality which the government tends to reduce; therefore, the optimal method for this is to impose a higher tax on the products that emit pollution to the environment like cigarettes. Hence, when a high tax is imposed on cigarettes than it will raise the per-unit price of the cigarettes and discourages its production.
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