Refer to the figure below. In this case, the private market ______ resources efficiently because ______.
A)does not allocate; demand and supply do not cross at the market equilibrium
B)does not allocate; some of the costs of paper production do not fall on producers
C)allocates; firms are motivated to maximize profit
D)allocates; consumers are willing to pay the external cost of production

Question

Refer to the figure below. In this case, the private market ______ resources efficiently because ______. 
A)does not allocate; demand and supply do not cross at the market equilibrium 
B)does not allocate; some of the costs of paper production do not fall on producers 
C)allocates; firms are motivated to maximize profit 
D)allocates; consumers are willing to pay the external cost of production

Quizplus · Accepted Answer

The private market does not allocate resources efficiently because some of the costs of paper production do not fall on producers. This is known as a negative externality, where the cost of production spills over to affect third parties who have no say in the production process. In this case, the cost of pollution from paper production is not reflected in the market price of paper. As a result, firms may overproduce paper, leading to an inefficient allocation of resources. Therefore, the private market fails to achieve the socially optimal level of production.

Refer to the Figure Below