AP Micro -- Unit 6

personal cost

the amount the buyer pays for a good

social cost

the amount a buyer pays + cost to society

externalities (external costs)

personal costs, social costs

external benefits

people don’t see the societal benefits of things, so they don’t get done

personal benefit

benefit buyer gets from buying a good

social benefit

benefit to buyer + benefit to society

market failure

overconsumption

Marginal Social Cost (MSC)

additional cost to society from each additional unit (slopes upward)

Marginal Social Benefit (MSB)

additional benefit from each additional unit (slopes downward)

negative externality

social costs are higher than personal costs (do less!)

positive externality

social benefit is greater than personal benefit (do more!)

Pigouvian Tax

unit tax on external cost (to eliminate negative externality)

lump-sum tax

doesn’t impact DWL

nonexcludable

anyone can use it

nonrivalrous

one person’s consumption doesn’t prevent someone else from using the good (e.g. roads)

free rider problem

people get away with using public goods with no personal cost

overuse of public goods due to low cost

Coase Theorem

if property rights are clear, parties can negotiate to eliminate externalities

public goods

a good with external benefits (positive externality) that is produced by the government

pure public goods

must be nonexcludable and nonrivalrous

can only be produced by the government

pure public goods ex

national defense (no one in the US can simply not be protected by the US military)

lighthouses (no one can be excluded from seeing a lighthouse)