Suppose that firms in the chemical industry are allowed, free of charge, to dump harmful products into rivers. If this is the case in a competitive market, how will the price and output of the chemical products compare with their values under conditions of ideal economic efficiency?

Question

Quizplus · Accepted Answer

If firms are allowed to dump harmful products into rivers free of charge, it reduces their production costs, making it easier for them to produce a greater output at a lower price. Therefore, they will produce an excessive amount of chemical products, leading to an overproduction of goods and a decrease in price. This is not an ideal condition for economic efficiency. In a competitive market, firms should be required to internalize the costs of their production, including the costs of pollution, in order to achieve an optimal level of output and price.

Suppose That Firms in the Chemical Industry Are Allowed, Free