Question

An economy produces only two goods, paper and scissors. Dyes from paper production pollute a nearby river. Use a production possibilities curve to illustrate your explanation of how the unfettered market would fail to provide the efficient mix of paper and scissors.

Answer 1

Label one point on the below-mentioned PPC expresses the efficient point where the different resources are considered along with the river. The river will not be included by the market in the total cost of producing the paper thus the production of the paper will be done more than its socially efficient amount. By default, the production of scissors will be less than the socially efficient level i.e. Point I