The criterion for allocative efficiency is derived for a market system consisting of producers, a processor, and consumers and compared to the solution conditions for cooperative and profit-maximizing processors. A cooperative that maximizes total member returns will restrict output to less than the social optimum unless it is a price taker in the processed product market. A cooperative that processes whatever quantity of raw product members choose to deliver will overproduce relative to the social optimum unless marginal and average processing costs are equal. An income tax can be used to move a cooperative that restricts output toward the social optimum.


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