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Efficiency in the presence of externalities

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Efficiency in the presence of externalities

Cigarette smoking imposes many external costs on society: secondhand smoke, the litter on the street from discarded butts, and so on. Therefore, the market equilibrium quantity of cigarettes is not equal to the socially optimal quantity. The following graph shows the demand for cigarettes (their private value), the supply of cigarettes (the private cost of producing them), and the social cost of cigarettes, including both the private cost and external costs.

Reference no: EM131395838

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