Final answer:
Smoking tobacco produces a negative consumption externality because it imposes health risks from second-hand smoke on others. Economically, this causes a deadweight loss as there is a difference between the market equilibrium for tobacco consumption and the socially optimal output and price.
Step-by-step explanation:
Smoking tobacco creates a negative consumption externality. This occurs when the consumption of a product results in adverse effects on third parties who are not involved in the consumption decision. In the case of smoking, these adverse effects manifest as second-hand smoke, which can impose health risks on others and thereby generate social costs not considered when a smoker decides to consume tobacco.
To illustrate this concept economically, consider a market in equilibrium where the private costs of consuming tobacco (such as the price of cigarettes) are represented by the equilibrium market price (Pm) and quantity (Qm). When factoring in the negative externality from second-hand smoke, the socially optimal output and price would be at Pe and Qe, which would be lower due to increased social costs. The gap between the market equilibrium and the socially optimal point represents the deadweight loss, which can be visualized in a supply and demand diagram by shading the area between the two equilibriums.