Question

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

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.