For national security reasons a government decides that all of its base metal industry should not be located in the same geographical region, as it presently is. The government decides to allocate production quotas to firms in different parts of the country, but does not restrict in any way the transactions between consumers and base metal producers. This scheme is:
A) efficient as consumers still buy from whoever they like.
B) efficient as those consumers who value base metals the most can purchase them.
C) likely to be inefficient as some of the industry's output is not produced by the firms with the lowest cost.
D) likely to be inefficient as the scheme will require subsidies to work.
E) efficient as learning by doing effects will be strongest in the firms set up in new geographical regions.

Question

Quizplus · Accepted Answer

The scheme is likely to be inefficient as the government is allocating production quotas to firms in different regions without considering their costs of production. This may result in firms with higher production costs receiving quotas and producing output that could have been produced at a lower cost by other firms. As a result, the industry's total output may be lower than it could have been with unrestricted production.

For National Security Reasons a Government Decides That All of Its