Question

Misallocating costs between two different jobs can cause several problems. The problems can include making an unprofitable job appear profitable and producing unprofitable products at the expense of profitable products. A third problem might be__________

Answer 1

Misallocating costs can result in distorted decision-making and resource allocation, leading to allocative inefficiency within a company. It can also contribute to broader market distortions like environmental externalities, resulting in societal costs such as pollution and inequality.

Step-by-step explanation:

Misallocating costs between different jobs can lead to a third significant problem: distorted decision-making. When costs are inaccurately attributed, it can lead to decisions that adversely affect a company's strategic planning and resource allocation.

Managers may continue investing in projects or products that appear to be profitable due to misallocated costs, while potentially halting or not investing enough in projects that are actually more profitable when the true costs are considered.

This can ultimately lead to allocative inefficiency, where the resources of a company aren't allocated to their best possible uses, thus wasting resources and potential profits.

Additionally, in the broader context of the economy, misallocation of costs can contribute to market distortions such as those caused by environmental externalities.

When businesses do not account for the social and environmental costs of production, this can lead to a mispricing of goods, resultant market inefficiencies, overproduction of harmful goods, and underproduction of beneficial goods.

These market failures can lead to unwanted results such as pollution, poverty, inequality of incomes, and other societal costs.