Suppose the production of paper towels results in the production of a by product: air and water pollution.?

[a3pointer52]

(a) Will the free market correctly measure the cost and benefit to society of paper towel production?
(b) Will paper towel consumption be more than optimal, less than optimal or exactly optimal if the market in which they are sold to consumers is perfectly competitive? Explain how we know.

[Hubris252]

A. No, the cost of the pollution is not borne entirely by the producers or consumers of paper towels.
B. Consumption will be more than socially optimal even if the market is perfectly competitive. Because some of the costs of the production of paper towels are borne by people who may not consume paper towels the market price will be below the social cost.