Can someone help me with these 2 Economics Questions?

Question

Question 1: A tax on cigarettes is designed to encourage consumers to consume fewer cigarettes. Which of the following will occur if this tax is imposed?

a) Social well-being will improve.

b) The burden of this tax will fall entirely on cigarette producers.

c) This distortion will cause a deadweight loss.

d) The tax will be considered nondistortional.

Question 2: Markets are inefficient when negative externalities are present because..

a) Social costs equal private costs at the private market solution.

b) Social costs exceed private costs at the private market solution.

c) Private beneftis exceed social costs at the private markket solution.

d) Externalities prevent the market from reaching equilibrium.

Thanks a lot.

Answer 1

1) C. You can look at this a couple of ways. Say that you would spend only $3 for a pack of cigs, because you get $3 of utility from them. Now, the tax is imposed and they cost $3.50. You are unwilling to pay that price. You, as the consumer, are losing $3 of utility, and the manufacturer is losing $3 of income. That is deadweight loss. Now, say you are willing to spend $4 on a pack that used to be $3. You would have had $1 in consumer surplus. Now, at $3.50, your surplus is only $.50. Because the additional cost is a tax, the manufacturer is not gaining any additional surplus to offset your loss.

2) B. Externalities add on a "hidden" cost to the public (social costs). You'll have to draw a graph to see this, but this additional social costs changes the equilibrium point.

Answer 2

Question 1:

I'm not entirely sure about this (but look up something called the Incidence of Tax to find out more).

Questions 2, Answer b (I think)

Take the example of using a car (a classic example of market failure). The consumer only pays for the petrol - which is the private cost of using the car. But you have to remember that when you use a car, you release pollutant gases which damage the environment, you wear down the roads a bit etc.. .

All of these other effects are examples of negative externalities - things that happen because of using the car, but are not considered for in the private cost of using the car (which is just the cost of petrol).

This means that the full, total cost overall of using a car isn't included in the private cost the consumer pays for it - which means that society ultimately ends up paying for it in some way or another. This means that markets are inefficient.