Say that the government is considering a ban on smoking in restaurants in Tobaccoville. There are 1 million people living there, and each would benefit by \(\$ 200\) from this smoking ban. However, there are two large tobacco companies in Tobaccoville and the ban would cost them \(\$ 5\) million each. What are the proposed policy's total costs and benefits? Do you think it will pass?

Cost-benefit analysis is an evaluation tool used to determine the feasibility of a project or policy, by comparing the total expected costs against the total expected benefits. In the context of public policy, such as the proposed smoking ban in Tobaccoville, the analysis involves quantifying the monetary value of all benefits and costs to the community as a whole.

Benefits in our given scenario would include the improved health of residents, the lower healthcare costs associated with treating smoking-related illnesses, and potentially, a more pleasing dining experience for restaurant-goers. On the other side of the ledger, the costs would be borne primarily by the tobacco companies due to potentially lost business.

It's important to note, however, that cost-benefit analysis is not purely arithmetic; it also involves judgment calls on valuing things like health improvements against economic losses, which can be subjective. The analysis should be thorough and include indirect effects, such as the impact on employment in the tobacco industry, and the ripple effect this might have on the local economy. In Tobaccoville's case, after calculating the numbers, a cost-benefit analysis would show that the total benefits would be \(200 \times 1,000,000\), or \$200 million, significantly higher than the combined \$10 million loss for the tobacco companies.

Public policy encompasses all the actions taken by government bodies to address public issues and is based on laws, regulations, decisions, and actions. These policies reflect societal values and priorities, and they can involve a complex process that includes problem identification, agenda setting, policy formulation, budgeting, implementation, and evaluation.

Creating policies like the smoking ban involves numerous stakeholders, including voters, public officials, advocacy groups, and industry representatives. In the example of Tobaccoville, the government would need to weigh the public health benefits against the economic impact on local tobacco businesses.

Additionally, for a policy to be enacted, it must be politically viable. Even if the health benefits are compelling and the economic costs are relatively low, public policies require the support of both policymakers and the electorate. Factors such as the influence of tobacco lobbyists, the current political climate, and the preferences of the population would all play crucial roles in determining whether the smoking ban would pass.

Market externalities are costs or benefits arising from an economic activity that affect third parties who are not directly involved in the transaction. They can be positive, such as the improved air quality from a public park, or negative, like the health care costs associated with smoking-related illnesses.

In the case of Tobaccoville, the primary negative externality is the health impact of secondhand smoke on the residents, particularly in restaurants. The government's proposed ban on smoking aims to mitigate this externality by improving public health, which is deemed beneficial for the majority of the population. However, there are also potential negative externalities, such as unemployment or reduced business profits, that can result from such a ban and directly impact the local economy.

Understanding the full range of externalities — both the obvious and the more nuanced indirect effects — is essential for sound economic policy analysis. Policy-makers must attempt to internalize these externalities, ensuring that the costs and benefits are borne by those who produce them, thus leading towards a more efficient and equitable outcome for society.