Final answer:
When cigarette manufacturers do not account for the external costs of smoking, such as health and environmental damage, they typically produce more cigarettes than is socially optimal. To address this, public policies like taxes and anti-smoking campaigns are necessary to decrease demand, particularly among the more price-responsive youth demographic. Graphical analysis of market equilibrium, social costs, and deadweight loss demonstrates the economic inefficiencies of unregulated smoking. Therefore correct option is C
Step-by-step explanation:
If smoking poses external costs on society, absent of regulation, cigarette manufacturers will likely produce a quantity of cigarettes that is greater than the socially optimal amount. This is because they do not bear the full cost of smoking's negative effects on health and the environment. In the absence of public policies such as taxes or regulations, the market will fail to account for the external costs, leading to overproduction and consumption beyond the socially desirable level. Deadweight loss is typically represented on a graph where the market equilibrium price and quantity are labeled Pm and Qm, respectively. To illustrate the negative externality, such as second-hand smoke, the social cost curve would be above the supply curve, indicating higher costs to society than to producers.
To reduce cigarette consumption, demand must decrease, especially among youth whose demand tends to be more elastic. Public education campaigns and increased taxes shift the supply curve from So to S₁, driving up the price and pushing the equilibrium towards a lower quantity of cigarettes consumed, thus achieving a social output and price closer to the optimal Pe and Qe. This shift usually results in a reduction of the quantity demanded by a greater percentage among youth compared to adults.
The impact of policies on demand elasticity is crucial in determining the effectiveness of interventions aimed at reducing cigarette consumption. Factors such as anti-smoking advertising and tax increases need to be tailored to the elasticity of the target group to ensure a significant decrease in smoking rates.