Please explain why and how demand and supply may not lead to

Please explain why and how demand and supply may not lead to the allocation of some resources to their best uses.

Solution

Demand and supply may not lead to the allocation of some resources to their best uses because of the presence of negative externalities such as pollution,. These externalities have spill-over effects. When the cost of these externalities are not internalised , that means their cost is not priced into a resource, both the demand and supply will be more than the optimal use, for conserving the long term viability of the resource as well as for generating negative externalities.

One other problem in the optimal allocation of the resources is the lack of strategic investment in the development of some resources when the risk is very high for just one single operator. It is comparitively easier to make strategic investments in allocation of resources to activities which do not have enough demand until the strategy is complete.