The Article above talks about the impacts on society as whole due to the consumption of cigarettes these impacts are known as externalities. 1An externality occurs when the actions of consumers or producers give rise to negative or positive side effects on other people who are not part of these actions, and whose interests are not taken into consideration.
Cigarettes are a very common example of Demerit goods. 2Demerit goods are goods that are considered to be undesirable but are overprovided and over consumed. 3Indirect taxes are imposed on spending to buy goods and services. They are paid partly by consumers, but are paid to the government by producers (firms), and for this reason are called ‘indirect’. These could include taxes on goods.
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6MPB refers to the benefits to the consumers from consuming one more unit of a good, whereas 7MSB refers to benefits to society from consuming one more unit of a good. Since the MPB of cigarettes is more than the MSB it is considered to be a demerit good as it causes a lot of negative externalities for people who do not smoke such as passive smoking and air-pollution which further leads to diseases and illnesses which then causes higher medical costs which is seen as an external burden on society. The shaded area in the diagram above represents the 4welfare (deadweight loss) refers to loss of a portion of social surplus that arises when MSB are ≠ to MSC (Q1 – Q*), The graph above shows that the MPB is more than the MSC which means that too much of the good is being produced, as mentioned earlier the welfare loss is equal to the difference between MSC and MSB curves for the amount of output which is overproduced which is then relative to the social optimum which