Question

we will learn about allocative efficiency, you need to discuss if the current food system is efficient or not. Compare the current market equilibrium in the market for factory farmed products with socially optimal equilibrium. Do you think socially optimal demand and supply should be higher or lower?

Answer 1

In case of factory farmed products, negative externality is imposed by the factory on to the society in the form of waste produced and released into the environment. This can be land pollution or water pollution or air pollution. Since factory producers do not take into account this external cost imposed by them on the society, their free market output production is greater than the socially optimal production (calculated by taking into account the marginal external cost). This can be seen in the graph below: MSC MPC Price ($) MSB Q, Q Quantity MSB is the marginal social benefit curve or the demand curve MPC is the marginal private cost curve MSC is the marginal social cost curve, calculated as MPC + External cost The free market outcome is while the socially optimal output should be Q1. This means in case of factor farmed products, the socially optimal level of output is less than the free market output produced and there is overproduction of the good taking place.