Ap micro 4 and 5

Market Failure

Inability of a market to bring about the allocation of resources that best satisfies the wants of society; involving under or over allocation due to externalities.

Total Surplus

The sum of consumer and producer surplus, also known as social surplus.

Consumer Surplus

The difference between the maximum price a consumer is willing to pay for an additional unit and its market price.

Producer Surplus

The difference between the actual price a producer receives and the minimum acceptable price.

Efficient Markets

Markets where resources are allocated in a way that maximizes total surplus, reflecting product and allocative efficiency.

Productive Efficiency

Production of a good in the least costly way, occurring at the output level where per-unit costs are minimized.

Allocative Efficiency

Apportionment of resources among firms to maximize the sum of consumer surplus and producer surplus.

Efficiency Losses (Deadweight Losses)

Reductions in combined consumer and producer surplus due to underallocation or overallocation of resources.

Externalities

Costs or benefits from production or consumption that affect third parties outside the transaction.

Negative Externalities

Costs imposed on third parties by the production or consumption of goods, without compensation.

Positive Externalities

Benefits obtained by third parties from the production or consumption of goods, without compensation.

Government Intervention

Actions taken by the government to correct market failures, particularly related to externalities.

Pigovian Tax

A tax levied on the production of a product that generates negative externalities, aimed at reducing overproduction.

Public Goods

Goods characterized by nonrivalry and nonexcludability, typically provided by the government due to their inefficiency in production by private sectors.

Free-Rider Problem

The inability of potential providers to obtain payment from users of a good because it is nonexcludable.

Quasi-Public Goods

Goods that have large positive externalities but could have excludability applied, often supported by government.

Government Failure

Inefficiencies in resource allocation due to problems in the public sector operations.

Principal-Agent Problem

Conflict of interest where agents pursue their own objectives at the expense of principals' goals.

Special-Interest Effect

When a small group benefits substantially at the expense of a larger group, often leading to inefficient political outcomes.

Rent-Seeking Behavior

Attempts by individuals or groups to gain benefits through political influence rather than productive economic activity.

Regulatory Capture

When a regulatory agency becomes dominated by the industry it is meant to regulate, leading to ineffective regulation.

Moral Hazard Problem

The risk that individuals will behave recklessly once they are insured against certain risks.

Adverse Selection Problem

When one party in a contract has more information than the other, leading to high risks for the less informed party.

Inadequate Buyer Information

Lack of information that results in underallocation of resources, such as unqualified individuals posing as professionals. (buyers not knowing enough information about the buyers)

Inadequate Seller Information

Situations where sellers lack necessary data about buyers, leading to reduced market activity.

Subsidies to Buyers

Government financial support to lower the cost of products/services to consumers.

Subsidies to Producers

Government financial support intended to decrease production costs and increase supply.

producer surplus

consumer surplus

efficiency loss from underproduction and from overproduction

dead weight loss