Return to the market for cigarettes from the previous question. What per-unit tax could the government levy to eliminate the deadweight loss from the behavioral bias?

Question

Quizplus · Accepted Answer

A per-unit tax that aligns the private cost of consumption with the social cost can eliminate the deadweight loss associated with a behavioral bias in cigarette consumption. Assuming the behavioral bias leads to overconsumption, a tax that raises the price to reflect the external costs (healthcare costs, reduced productivity, etc.) can reduce consumption to the socially optimal level. Without specific numbers from the previous question, a general principle is that the correct tax would be the one that corrects for the discrepancy between private and social costs.

Return to the Market for Cigarettes from the Previous Question