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A-Level Economics · Negative consumption externality diagram question

A* question: at what level must a MINIMUM PRICE be set to cut consumption to the social optimum (Q = 3)?

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The diagram

The answer

Point A. Read UP from Q=3 to the PRIVATE demand curve (point J): £7. At £7, smokers choose exactly 3 — the floor does the tax's job through price. Consumers choose along MPB. To make them pick Q=3, price must rise to MPB's height at 3 — point J, so the floor goes at £7 (point A). Reading the price off S or MSB is the classic error — this is minimum pricing on alcohol in Scotland, done on the diagram.

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This is one of 5 questions on the negative consumption externality diagram — every corner lettered, every wrong answer diagnosed.

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