AP Microeconomics Unit 6 Flashcards

Flashcards covering market failure, government intervention, efficiency, equity, income inequality, and redistribution.

What are Externalities?

Costs or benefits that affect third parties not involved in the transaction; a main source of market failure.

What is a consequence of negative externalities (e.g., pollution)?

Too much of the good is produced.

What is a consequence of positive externalities (e.g., vaccinations)?

Too little of the good is produced.

What are Public Goods?

Non-rival and non-excludable goods (e.g., national defense).

What is the 'free rider problem'?

People benefit without paying.

What are Common Resources?

Rival but non-excludable resources (e.g., fisheries).

What does the 'tragedy of the commons' refer to?

Overconsumption of a common resource.

What is Imperfect Information?

When one party knows more than the other, leading to inefficiency (e.g., in insurance or used car markets).

How can Governments correct market failures?

Taxes, subsidies, regulations, provision of public goods, command-and-control policies, and market-based policies.

Why might a government impose a per-unit tax on pollution?

To internalize negative externalities.

Why might governments provide subsidies?

To encourage consumption of goods with positive externalities.

What is Efficiency?

Maximizing total surplus.

What is Equity?

Fairness in the distribution of resources.

What does the Lorenz Curve show?

Shows income distribution.

What does the Gini Coefficient measure?

Measures inequality (0 = perfect equality, 1 = perfect inequality).

How might governments redistribute income?

Progressive taxes and transfer payments.

What are Progressive Taxes?

Higher income = higher tax rate.

What are examples of Transfer Payments?

Unemployment benefits and welfare.