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EconActive Solutions (CNN News Questions)
Chapter 10: Canadian Cigarette Tax: el3m02v1
- What kind of externality is cigarette smoking?
- What kind of tax is the Canadian tax on cigarettes?
- How is the tax on cigarettes different from most other taxes?
Answers:
- Cigarette smoking is a negative consumption externality.
- The Canadian cigarette tax is an example of a Pigovian tax, which is designed to internalize at least some of the negative externality.
- Pigovian taxes like the Canadian cigarette tax seek to correct incentives and move resource allocation closer to a social optimum. Other taxes, such as payroll, income, and sales taxes usually distort production and consumption decisions and result in deadweight losses of consumer and producer surplus.
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