IB Economics Commentary on Market Failure

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Commentary 3

This article from Newsaday.com, "proposed cigarette tax increase rile smokers in NY" is about cigarette smoking in New York as a cause to market failure. The government tried to tackle the problem of market failure through the implementation of an increase in indirect tax (a tax imposed on spending)

In this article, I will evaluate whether the government intervention was effective with its method of eliminating market failure.

Market Failure is the failure of an unregulated market system to achieve allocative efficiency (the situation when no resources are wasted) or social goals. In this article there are two causes to market failure: the oversupply of demerit goods (a good which the political process had decided is socially undesirable) and the negative externality of consumption (cost of consumption by society but not the consumers themselves).

The consumption of demerit goods impose negative externalities on the society, where the private costs incurred by the smoker where he/she damages his/her own health, are less than the social costs experienced by the society who involuntarily experience passive smoking, as well as air pollution. However, the price that is paid for each packet of cigarette is not