AP Microeconomics Unit 6

Allocative Efficiency

Occurs when Marginal Benefit equals Marginal Cost (MB=MC) in resource allocation.

Socially Efficient Market

A market where Marginal Private Cost equals Marginal Social Cost (MPC=MSC) and Marginal Private Benefit equals Marginal Social Benefit (MPB=MSB).

Market Failure Causes

Market power (-opolies/-opolistic), asymmetric information, private costs/benefits only (externalities), and insufficient production of public goods.

Deadweight Loss Characteristics

Can arise from taxes, trade barriers, price floors/ceilings, imperfect competition, and externalities.

Tariff Deadweight Loss

Occurs when tariffs raise prices, leading to lost surplus not fully transferred to consumers or producers.

Negative Externality

When the actions of one party impose costs on another party.

Shift the Marginal Social Cost Curves to the left making them higher than the Marginal Private Cost resulting in the socially optimal output becoming less than the market equilibrium.

Overallocation of resources.

Coase Theorem

Suggests bargaining between parties can lead to optimal/efficient outcomes solving externalities without government intervention.

Public Goods Characteristics

Non-exclusion, shared consumption

Free Rider Problem

Occurs due to non-excludability (can't be portioned out between those who paid and those who didn't) and lack of incentives for non-payers to pay.

Tragedy of the Commons

Happens when common resources are over-consumed by individuals acting in their own best interest.

Government Tax Intervention causes efficiency in what market?

Imperfectly competitive markets

Asymmetric Information

Refers to situations where one party has more information than the other in an economic transaction.

Antitrust Policies

Regulations aimed at ensuring fair competition in markets.

Lorenz Curve

A graphical tool that represents income or wealth inequality by plotting cumulative income/wealth against population percentiles.

Gini Coefficient of 0

Perfect equality of income or wealth.

Sources of Income Inequality

• Supply and Demand in labor markets

• Marginal revenue product of the worker

• Human capital

• Social capital or social mobility

• Inheritance

• Access to financial markets

• Discrimination

• Bargaining power

Human Capital Impact on Wages

More educated or skilled workers typically earn higher wages due to increased productivity.

What percentage of US wealth comes from inheritance?

Approximately 35%

Which market inefficiency occurs when sellers have more product knowledge than buyers?

Adverse selection (when sellers know more about the quality of their product than buyers)

Primary Role of Non-Price Regulation

• fair competition

• environmental protection

• general health and safety