Question

Market efficiency and market failure

Suppose that the following graph shows a free market equilibrium, with Q as the equilibrium quantity.



For an output level exactly at , the value of a unit to a buyer is EQUAL TO OR GREATER THAN OR LESS THAN the cost of a unit to a seller.

Suppose a firm that produces for this market is able to dump toxic chemicals into a river next to its factory, which poisons wildlife and harms the health of nearby residents, who have no business with the company. This scenario is characterized by MARKET POWER OR AN EXTERNALITY, which is an example of MARKET FAILURE OR CONSUMER SURPLUS.

Answer 1

Missing Part of Question:

The related graph was not present with the original question, so I am attaching it here.

Step-by-step explanation:

`Q_(E) \;=\;Equilibrium\;Quantity\\`

(a) In a free market, at a quantity exactly equal to
`Q_(E)`, the value of a unit to a buyer is equal to the cost of a unit to a seller. For a quantity below
`Q_(E)`, the value of unit to a buyer is greater than the cost of that product to the seller. Finally, for a quantity above
`Q_(E)`, the value of that unit to the buyer is less than the cost incurred by the seller.

(b) The dumping of toxic chemicals is a typical scenario of Negative Externality which may lead to Market Failure due to poor display of supplier reputation.