Eu And Externality

The European Union has focused on the impact of tobacco use with the first EU tobacco-control legislation in the late 1980s. The EU legislated policies have been further developed with its certain purposes. The EU aimed to encourage tobacco users to cease and protect their citizens who are exposed to second-hand smoke in order that citizens could reside and work in smoke-free environments. The reason why the EU has endeavored to intervene with the production and consumption of tobacco has originated in one factor: negative externality. Negative externality can be defined as an adverse effect of production and consumption of goods or services, which imposes external costs on the third party outside the market. The activity of producers and consumers

However, a failure of the market can occur when the price system fails to take into account all of the costs and benefits involved, leading to an inefficient allocation of scarce resources in the free market. Externalities are often regarded as a source of market failure because the occurrence of externality leads the market to produce too much, over production, or too little of a good or service, under production. The externality can be divided into two types: positive externality and negative externality. While the negative externality is a cost caused by that market activity, the positive externality is a benefit that occurs as a consequence of the market activity, resulting in beneficial impact on bystander not involved in the production or consumption of a good. Both externality can be commonly found in everyday life. Positive externality, for example, can happen as a result of immunizations and research into new technologies whereas the negative externality can arise from automobile exhaust and barking

The negative externalities of tobacco use have existed all over the world and mainly occurred in two forms: health risks such as a cardiovascular or lung cancer and environmental pollution. These negative externalities can be illustrated in graph In terms of production of tobacco, negative externalities occur when the marginal social cost (MSC), the change in total cost to society as a whole brought about by the production of one further unit of a good or service, is greater than the marginal private cost (MPC), the change in the producer’s total cost brought about by the production of an additional unit of a good or service, shown in figure 1. In the case of tobacco market, the MSC may represent the adverse effect of production of tobacco such as chemicals produced by operation of factories, which can cause health and environmental problems. On the other hand, the MPC can indicate the increase in the risk of death from many disease such as cancer and ischemic heart disease. As explained above, the market equilibrium is where the quantity supplied is equal to quantity demanded. In this graph, the market equilibrium is market price of OE and production at OB where the MPC equals MPB. While the free market equilibrium is where the MPC matches the MPB, the social optimal level of production is where the MSC