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 will result in an over-allocation of resources to this product as the market supply curve S underestimates the true cost of production due to external costs not being accounted for. As a result, the market equilibrium quantity and price will be higher than the socially optimal quantity and price, leading to an over-allocation of resources.

Refer to the Diagram in Which S Is the Market