Question:
Suppose the U.S. government determines that cigarette smoking creates social costs not reflected in the current price of cigarettes in the market. A study has recommended that the government can correct for the externality given the effect of cigarette consumption by paying farmers not to plant tobacco used to manufacture cigarettes. Assuming that the government is correct that cigarette smoking creates external costs, evaluate where the study's recommended policies might help correct this externality. Why does the presence of externalities not reflect society's costs and benefits in the market? Why are markets considered to fail the appropriate allocation of resources that are needed in the market? When answering the question, make sure to evaluate it from the different stakeholders that are present in the market.