What are some main solutions for consumption negative externalities, such as smoking?

Negative consumption externalities derive from the marginal personal benefit being higher than the marginal social benefit. This creates a welfare loss triangle, which the government tries to avoid. Demerit goods have these negative externalities, as a demerit good is a good which is over consumed in a free market, reflecting allocative inefficiency. Examples of demerit goods and cigarettes and drugs. There are multiple solutions put in place to reduce these negative externalities from the consumption of demerit goods, such as cigarettes. An indirect tax may be one of the most common solutions to the market failure, set by the government. This increases the price of products so that demand for the good decreases. The excess revenue then goes to the government as tax revenue. This has already been done with tobacco and has had a positive effect in reducing the amount of tobacco bought and consumed. However, indirect taxes may not always work, as demerit goods tend to be price inelastic, so a huge change to the price of the good may not have the same affect to the demand. Therefore, this may negatively impact those from the working class, who tend to be more likely to smoke, as they are paying more for an addiction that they probably couldn't afford before the tax was introduced.

Answered by Nicole K. Economics tutor

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