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Give two reasons and explain why the efficient allocation of water may not be reached.

Give two reasons and explain why the efficient allocation of water may not be reached.

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Answer #1

Usually, water is supplied free of cost to all citizens. following reasons cause inefficient allocation of water:

  • Market failure and negative externalities: Water being free leads to the overuse of water. Hence, it does not reflect true demand and supply in market. Overuse of water causes negative externalities.
  • Efficiency is achieved where P =MC, cost and price are not carried out for water which leads to overproduction and future generation bear deadweigtloss.  
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