NUS ECONS 3101 - Assume that the daily demand

Assume that the daily demand for packs of cigarettes in the tobacco-addicted nation of Pcoria is as follows:

Q = 100 – P

Further assume that the marginal cost of producing a pack of cigarettes is $6, and that the market for cigarettes is perfectly competitive. Assume that each pack of cigarettes smoked does $6 worth of health damage to the smoker in the form of increased cancer risk and a total of $5 worth of health damage to the smoker’s neighbors via second-hand smoke. Finally, assume that all Pcorian cigarette consumers are aware of these costs.

(a) Assume that a Pcorian smoker named Jay states that he is willing to buy a pack of cigarettes for $8, but not a penny more. In this market, where the price is $6 per pack, what are the private benefits and private costs incurred whenever he buys a pack of cigarettes?

(b) Is it privately efficient for him to buy a pack of cigarettes at this price?

(c) What about the public benefits and public costs?

(d) Is it socially efficient for him to buy a pack of cigarettes at this price?

(e) Suppose that, due to the introduction of a hyper-effective tobacco fertilizer, the cost of producing a pack of cigarettes plummets to $1. Now is it socially efficient for Jay to purchase a pack of cigarettes?