Final answer:
The market for cigarettes in equilibrium is determined by the intersection of the demand and supply curves. However, the negative externality of second-hand smoking introduces additional costs that are not accounted for in the private market outcome.
Step-by-step explanation:
The subject of this question is Social Studies at a High School level. When examining the market for cigarettes, the equilibrium price and quantity are determined by the intersection of the demand and supply curves. This is represented by point E in the graph. At this point, the quantity demanded by consumers (Qm) matches the quantity supplied by producers, and the price of cigarettes (Pm) is determined.
However, when considering the negative externality of second-hand smoking, the social optimal output and price (Pe and Qe) would be different. The impact of the negative externality demonstrates that the private market outcome does not account for the full cost to society. A shaded area in the graph represents the deadweight loss, which is the welfare loss due to the negative externality.