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. a leftward shift of the supply curve of cigarettes.

b. an increase in the negative externality caused by cigarette smoking.

c. a reduction in the negative externality caused by cigarette smoking.

d. a leftward shift of the supply curve of tobacco.

Explanation:

When the government pays farmers not to plant tobacco, the supply of tobacco decreases, shifting its supply curve leftward. With less tobacco, cigarette production is affected and the supply curve of cigarettes also shifts leftward. This action aims to correct the negative externality of cigarette - smoking, thus reducing it, not increasing it.

Answer:

B. an increase in the negative externality caused by cigarette smoking