Econ Micro IA

Topics: Supply and demand, Externality, Free market Pages: 3 (767 words) Published: June 1, 2014
Chicago to Raise Cigarette Tax
Source: Chicago Sun Times
Accessed: November 23, 2013
Posted: November 21, 2013
Word Count: 748
Written: November 25, 13
The city council in Chicago, Illinois is discussing a raise to the tax on cigarettes in an effort to cut the amount of people who start smoking each year. This type of tax is called a Pigouvian tax (meant to limit consumption of a good). Currently, the cigarette tax has been stuck at 68 cents a pack since 2006 and the plan is an increase of 75 cents. Mayor Rahm Emanuel says that the tax could generate up to 10 million dollars in government revenue, which he plans to put towards vision and eye care programs in the public school system.

The issue here is an example of supply and demand (the relationship between a consumer’s ability and willingness to pay for a good at any given price) being affected by market failure (when the amount of a good supplied doesn’t equal the amount demanded). Without government intervention (regulatory actions taken by the government to alter the free market economy for a certain good), the free market equilibrium point (the point at which the quantity demanded equals the quantity supplied) would balance itself out and the market for cigarettes would be at maximum efficiency. However, at this free market point, there is a negative externality of consumption (when the cost of using a certain good costs society more than the individual using said good), second hand smoke. This negative externality of consumption is an example of market failure.

This graph shows a negative externality of consumption from consuming cigarettes, namely, second hand smoke. Point A demonstrates the point at which the market equilibrium is. At this point the marginal private benefit (an individual’s unique benefit from the good) is to the right of the marginal social benefit (what society benefits from). This situation occurs when the...
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