The surgeon general has determined that smoking causes cancer and heart disease for both smokers and passive smokers (nonsmokers who breathe smoke filled air). if cigarette prices are determined in a free market, which of the following will be true?
1. the price of cigarettes will be too low and the quantity sold will be too high
2. the price of cigarettes will be efficient but the quantity sold will be too high
3. the market will be efficient because markets always equate marginal benefits and marginal costs
4. the price of cigarettes will overstate the true social cost imposed on nonsmokers

1) The price of cigarettes will be too low and quantity sold will be too high

Explanation:

The fact that so many people suffer from lung cancer directly associated with smoking, either first hand or second hand smoking, means that too many cigarettes are being consumed. Since too may cigarettes are being consumed, that means the price of cigarettes is too low. The only way to reduce the negative side effects and costs of smoking would be to levy a heavy tax on cigarettes. That should increase their price so much that eventually the quantity demanded should significantly lower.

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