Microeconomics Coursework †Minimum wage Essay

Negative externalities be the undesirable effects of the using up or production of a good on outsiders (individuals or firms) that atomic number 18 not accounted for in the private market (market for private firms and individuals) and atomic number 18 then called spillover effects. For example in the case of tobacco, the disallow externalities are health and are risks to the users and the people around them, pollution of the surrounding areas, addiction etc. It is a type of market ruin. market place failure is when a market kit and boodle badly or is absent completely. In this case, the market is overproducing tobacco therefore it is a market failure.This indicates that the social upbeat is less than private benefit i.e. benefit to individuals. This can be shown in the market diagram for tobacco.Market for tobacco showing negative externalitiesQuantity of tobacco (hundreds of tonnes)MSB is the marginal social benefit (social posit). It is the demand curve showing social d emand for tobacco. MPB is the marginal private benefit (individual demand). The vertical distance between the 2 demand curves is the negative externality, i.e. P3-P2. When MSB = MPB, there is no market failure as the good is not being overproduced anymore. Therefore to decrease the negative externality, it must be incorporated into the price, thus decreasing the quantity demanded to comprise the MSB equilibrium quantity (Q1).Tobacco is thus a defect good1. It is not only supplied in the form of cigarettes but also in the form of tobacco pouches that can be used in roll-up cigarettes. Consumers are switching from cigarettes to roll-ups because the appraise on tobacco pouches is less than that on cigarettes.The UK governing has levied an average tax of 75 90% on a big bucks of cigarettes whereas the tax on roll-up tobacco is just below 70 portion. One solution to reduce the consumption of tobacco is to increase the tax on tobacco as a whole instead of on cigarettes or tobacco pouches. The supply will therefore shift to the left. This is shown in the diagram below.