Week 1 Assignment: Externalities, Suppose The US Government

Week 1 Assignment Externalitiessuppose The Us Government Federal

Suppose the U.S. government (Federal Agency) determines that cigarette smoking creates social costs not reflected in the current price of cigarettes in the market. To this end, a study recommends that the government can correct for the social cost (externality) by paying farmers not to plant tobacco used to manufacture cigarettes. Assuming that the government is correct that cigarette smoking creates external costs; prepare a three-page paper (not including the title and reference pages) that evaluates the study’s recommendations mentioned above. Start your paper with an explanation of externalities (positive and negative) and why society’s costs and benefits are not always reflected in the market.

Describe how markets fail to allocate the appropriate amount of resources. Your responses need to consider the different perspectives of the stakeholders. Format your paper according to APA style guidelines and use at least two scholarly sources.

Paper For Above instruction

Externalities are unintended side effects of economic activities that impact third parties who are not directly involved in the activity. They can be classified as positive, where there is a beneficial effect, or negative, where harm or costs are imposed. The concept of externalities is central to understanding market failures because they highlight situations where the social costs or benefits of an activity are not fully reflected in market prices. This discrepancy leads to an inefficient allocation of resources, as market participants respond only to private costs and benefits, neglecting the broader societal implications.

Negative externalities, such as pollution from industrial activities or smoking-related health costs, result in social costs that are not incorporated into the market price of the good or activity. Conversely, positive externalities, like vaccination programs or education, generate social benefits that exceed private benefits but are often undersupplied by markets. The failure to account for these externalities signifies a market failure because resources are not allocated in a way that maximizes societal welfare.

Market failure occurs when the free market does not produce an optimal allocation of resources, leading to overproduction of goods with negative externalities and underproduction of goods with positive externalities. In the case of cigarette smoking, individuals may underestimate or ignore the social costs associated with their consumption, such as healthcare costs, secondhand smoke effects, and productivity losses. Consequently, the market price of cigarettes fails to reflect these external costs, resulting in higher consumption levels than socially optimal.

Many stakeholders are affected by these externalities, including smokers, non-smokers exposed to secondhand smoke, healthcare providers, government regulators, tobacco farmers, and the broader society. Smokers may see cigarettes as affordable and satisfying, while non-smokers and society bear the health and economic burdens. Farmers who cultivate tobacco are economically motivated to grow more tobacco, despite its negative societal impacts. Governments, recognizing these external costs, may seek corrective measures to align private incentives with societal welfare.

The study's recommendation to pay farmers not to plant tobacco aims to address the externality by reducing the supply of tobacco, thereby decreasing cigarette consumption and its associated social costs. This approach is a form of supply-side intervention aimed at internalizing external costs, similar to a negative externality tax or quota system. It intends to shift the market equilibrium towards a socially desirable level of cigarette consumption, thus reducing health costs and societal harm.

From the perspective of tobacco farmers, this intervention could be viewed as a subsidy removal or an economic disincentive, potentially affecting their income and livelihood. For consumers, reduced cigarette availability may lead to lower consumption or increased prices, possibly encouraging cessation. Healthcare and public health advocates would support these measures as they could lead to substantial reductions in smoking-related health issues and costs. However, opponents might argue that such policies can infringe on personal freedoms or disproportionately impact small farmers, raising questions about fairness and economic support for affected populations.

Ethically, this intervention aligns with the principle of externality correction, aiming to internalize costs that society bears but are not reflected in market prices. Economically, reducing the supply of tobacco is expected to decrease consumption and associated external costs, improving overall societal welfare. However, it must be carefully designed to balance economic impacts on farmers and consumers while achieving health and social objectives. Incentive programs, such as offering alternative crops or economic assistance to farmers, can mitigate potential adverse effects and promote equitable outcomes.

Additionally, implementing public education campaigns about the harms of smoking and regulating tobacco advertising complement supply-side policies. Combining supply reduction with demand-side interventions increases the likelihood of successful externality correction. Policymakers must consider the trade-offs involved, including economic impacts, individual rights, and public health benefits, to develop balanced and effective solutions.

In conclusion, externalities represent a critical failure in market mechanisms, where societal costs of activities like cigarette smoking are not reflected in market prices. Corrective measures, such as government payments to farmers to reduce tobacco planting, aim to internalize external costs and promote resource allocation aligned with societal welfare. Stakeholder perspectives vary, underscoring the need for holistic policy approaches that address economic, ethical, and health considerations to effectively manage externalities related to cigarette consumption.

References

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• Pigou, A. C. (1920). The Economics of Welfare. Macmillan.
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• Stiglitz, J. E. (1989). Economies of Ideas and Externalities. The American Economic Review, 79(2), 297–302.
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