1. Consider a perfectly competitive market for cigarettes, where the marginal cost of producing a pack of cigarettes is $8. Also, assume that each pack of cigarettes incurs a cost of $6 to the smoker in the form of increased cancer risk and incurs a cost of $5 to the smoker’s neighbors in the form of secondhand smoke. Suppose each consumer can buy and smoke either zero packs of cigarettes or one pack of cigarettes (i.e., a consumer cannot buy a partial pack).
   1. Suppose one consumer, Edward, values each pack of cigarettes at $10. Given the information above, what are Edward’s private costs and benefits of smoking a pack of cigarettes? Is it privately efficient for him to buy and smoke a pack of cigarettes?
   2. What are the public costs and benefits of Edward smoking a pack of cigarettes? Is it socially efficient for Edward to buy and smoke a pack of cigarettes?
   3. Suppose that, due to the introduction of a hyper-effective tobacco fertilizer, the cost of producing a pack of cigarettes plummets to $1. Is it now privately efficient for Edward to buy and smoke a pack of cigarettes?
   4. With the cost of producing a pack of cigarettes at $1, is it now socially efficient for Edward to buy and smoke a pack of cigarettes?

Answer rating: 100% (QA)

Answer The preceding data Edwards personal gain 10 Edwards private expense 8 6 14 Becau... View the full answer