Negative Externalities of Consumption

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Negative Externalities Of Consumption - Smoking With help of a diagram, explain why cigarette smoking is an example of market failure? Market failure happens when resources are not used in a way that produces the best allocation for consumers. It occurs when the Free Market Mechanism fails to achieve economic efficiency. An externality is an effect whereby those uninvolved in the decision making process are affected by the consequences that are a result of the actions of others. This is known as a spillover effect. There are both positive and negative externalities and both can lead to market failure. A negative externality is when the social cost of an action exceeds the social benefit. It occurs when an individual or firm makes a decision and doesn’t have to pay the full cost of the decision. If a good or a service has a negative externality, then the cost to society is greater than the cost a consumer is paying for it. Since consumers make a decision under the assumption that their marginal cost equals their marginal benefit, they forget to take into account the cost of the negative externality. This usually results in market inefficiencies or market failures. Cigarette smoking is a prime example of a negative externality. Individual smokers can be harmful not only to themselves but also to the people around them who in turn are coerced to become passive smokers. It can lead to serious illnesses and diseases such as cancer and can cause people numerous other problems. Smokers also harm the environment as harmful toxic substances such as carbon monoxide are released due to the consumption of a cigarette. This not only harms the ozone layer but also leads to air pollution which is also harmful to plant and animal life. Therefore, the negative impact of smoking can be felt in various components of the ecosystem. Cigarette smoking explained as an
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