Refer to the diagram in which S is the market supply curve and S₁ is a supply curve comprising all costs of production, including external costs.Assume that the number of people affected by these external costs is large.Without government interference, this market will result in: A)an optimal allocation of society's resources. B)an under-allocation of resources to this product. C)an over-allocation of resources to this product. D)a higher price than is consistent with an optimal allocation of resources.

Question

Quizplus · Accepted Answer

Without government interference, the market would result in an over-allocation of resources to the product. This is because the supply curve does not take into account the external costs, which would make the actual cost of production higher than what is indicated by the market supply curve. As a result, firms would produce more than what is socially optimal, leading to an over-allocation of resources. Additionally, the price would be lower than what is consistent with an optimal allocation of resources, since the market price only reflects the private costs of production and not the external costs.

Refer to the Diagram in Which S Is the Market