Question

Consider the scenario, where in the production of product A there are two types of risks. There is a risk to the health of the workers involved in the production of the good and there is a potential risk to the final consumers of the product. Which of these risks (if revealed) would lead to an efficient market allocation of the good? Briefly explain.

Answer 1

Efficient market allocation of goods, takes place when there is a maximum production of good with the given resources. In the given scenario, if the risk associated with the health of the worker is revealed, then workers will refuse to work unless they are given the safe work environment or they are given the higher wages. In both of these cases, cost of production will increase and output level will come down. As a result, efficient market allocation takes place. So, it is the risk associated with the health of the workers, will lead to the efficient market allocation if it is revealed.

If risk associated with the final consumers is revealed, then the demand of the product will come down and shifts to the left side. But, it does not affect the firm's capability to produce the goods with a given resource.