Econ Summer Vacation Homework
G11T1M0
11-1 鲁怡晨 Clementine 20238108
Article 1
1) Summary
The use of cigarettes and e- cigarettes highly threatens Americans’ health, so the US
government decides to raise tobacco taxes to help smokers quit. The revenue will be used to
finance other health care policies.
2) Definiton of economic terminologies

Indirect taxes : Taxes levied on spending to buy goods and services, the payment of
some or all of the tax by the consumer is involved, they are paid to the government
authorities by the firms.

Negative Consumption Externalities : They are the external costs created by consumers
that spill over onto society in the form of costs to third parties.
3) Identification of 1 key concept
The concept that is most relevant to this article is Intervention. Intervention in economics
usually refers to government involvement in the workings of markets. In this article, the
government is involved in the tobacco market, since the government decides to raise the
tobacco tax in order to reduce the toll from tobacco use.
4) Main economic issue
The type of market failure here is externalities (Negative Consumption Externalities). The
consumption of cigarettes creates Negative Consumption Externalities, since cigarettes are
a kind of demerit good. The external costs include “medical costs”
“productivity losses”
(para. 5) and
(para. 5).
The smokers’ actions only considered their own private benefits, resulted in external costs
for the third party since at Qm, MPB > MSB (MSC > MSB). The resulting welfare loss implies
that the free market overallocates resources to the consumption of the good.
5) The policy solution
The policy solution suggested by this article is levying indirect tax.
The policy will shift MPC leftward (from MPC to MPC + tax). The quantity will be decreased
from QM to Qopt, and the price will increase from Pm to PC. Welfare loss is eliminated and
the problem of NCE is addressed.
6) Advantages and disadvantages
Advantages:
1. Those smokers that caused the external costs would have to pay for them (which is fair).
2. This action would raise revenue for government programs.
Disadvantages:
1. It may help create illegal markets as smokers seek to avoid paying the taxes
2. The effectiveness of the tax in reducing the use of cigarettes depends on the PED of
cigarettes.