Many people who do not smoke cigars are bothered by the odor of cigar smoke. If private contracting is impossible, will too many or too few cigars be produced and consumed? Taking all costs into account, is the market price of cigars too high or too low?

If private contracting is impossible, too many cigars would be produced and consumed. The market price of cigars is too low.

Negative externality is when the production or consumption activities of economic agents negatively affects third parties not involved in production or consumption.

For example, smoking a cigar affects others that are not smoking that are around the person that is smoking. Negative externality occurs because the cost of production or consumption is too low.

To learn more about externalities, please check:

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