Suppose that a paper producer dumps its waste into a local river. Explain why this situation is inefficient

What will be an ideal response?

Firms in perfect competition maximize profit by producing where price is equal to marginal cost. As long as the marginal cost represents the true opportunity cost of the resources used in production, the outcome is efficient. However, if a firm is dumping its waste into a river, and is not taking the cost of this resource into account, it will produce too much of the good.