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The long distance transport of food has come in for huge criticism from environmentalists who argue that the price paid by consumers does not fully reflect the social cost of production. They argue that transporting food over long distance creates negative externalities in the form of pollution. Whenever production creates negative externalities the marginal social cost of production is greater than the marginal private cost. In a free market economy firms will produce up to the point where the marginal private cost of production (MPC) is equal to the demand curve (Q1). In the absence of externalities this would represent an efficient allocation of resources as price would equal marginal cost.
However because externalities exist output Q1 represents an inefficient allocation of resources since price does not equal the full marginal social cost. When externalities exist the socially optimal allocation of resources occurs at Q2 where price equals marginal social cost.
marlinbito answered the question on July 6, 2018 at 08:44
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