Question

Suppose that the U.S. government determines that cigarette smoking creates social costs not reflected in the current market price and equilibrium quantity of cigarettes. A study has recommended that the government can correct for the externality effect of cigarette consumption by paying farmers not to plant tobacco used to manufacture cigarettes. It also recommends raising the funds to make these payments by increasing taxes on cigarettes. These actions by the government lead to all the following outcomes, except

A leftward shift of the supply curve of tobacco
A leftward shift of the supply curve of cigarettes
An increase in the negative externality caused by cigarette smoking
A reduction in the negative externality caused by cigarette smoking

Answer 1

Government interventions like paying farmers not to grow tobacco and increasing cigarette taxes are intended to address the negative externality of smoking by reducing the supply of tobacco and decreasing the quantity of cigarettes demanded, not to increase the negative externality.

Step-by-step explanation:

The U.S. government assessing that cigarettes cause social costs not reflected in the market price is addressing a classic case of a negative externality. Paying farmers to not plant tobacco and increasing taxes on cigarettes are two ways to internalize the externality.

Paying farmers not to grow tobacco would likely reduce the supply of tobacco, shifting the supply curve of tobacco to the left. Consequently, this would also shift the supply curve of cigarettes to the left, since tobacco is a primary input in cigarette production.

Raising taxes on cigarettes aims to reduce consumption by increasing the price, thereby moving the equilibrium towards a socially optimal level where the external costs of smoking (like health care costs and second-hand smoking effects) are accounted for. This would most likely reduce the negative externality caused by cigarette smoking as the quantity demanded would decrease.

The one outcome that does not follow from the government interventions described is 'An increase in the negative externality caused by cigarette smoking'. Instead, such government actions are intended to reduce the negative externalities.