The government is considering the imposition of an excise tax on cigarettes with the rationale of reducing the negative externalities of cigarette smoking

The government is considering the imposition of an excise tax on cigarettes with the rationale of reducing the negative externalities of cigarette smoking. Ideally, the size of the excise tax should be: c) equal to the excess of the social cost over the private cost.

An excise tax is sometimes also called a "luxury tax" or a "sin tax," which means that the tax tries to discourage unhealthy behaviors or that the tax tries to internalize a negative externality. In the case of cigarettes, the negative externalities are air pollution that impacts everyone and increased medical costs for the damage smokers do to their own health. The tax should impose the full cost of the behavior on those who are smoking; therefore, they should pay the cost of the cigarettes (private cost) plus the costs of the pollution and the extra medical costs they impose on society (social cost).