ap micro unit 6

externalities

costs/benefits placed on members of society that did not participate in market transaction

negative externalities

external cost to society (MSC > MPC). Gov can correct this by using per unit taxes

• Forces firm to produce at a socially optimal Q (decreases supply, lowers Qe and raises prices for customers)

positive externalities

external benefits for society (MSB > MPB). Gov can correct this by per unit subsidy

• lowers production costs, shifts supply curve up/left, increases Qe and lowers prices for customers

marginal private cost (MPC)

additional cost firm has after producing one more good (like labor and materials). Supply curve in free market

marginal social cost (MSC)

additional cost to society of producing one more unit of a good (like pollution).

marginal private benefit

additional benefit consumer gains from consuming one more unit of good/service

marginal social benefit

benefit society from consuming one additional unit

deadweight loss

represents loss of economic efficiency when they don’t produce at socially optimal quantity - lost surplus that consumers/producers/gov can’t capture

socially efficient/allocatively efficient

MSB = MSC, otherwise there is market failure

per unit tax

fee on every unit produced/sold. Shifts supply curve up/left. Fixed negative externalities by decreasing production until market reaches social optimal quantity, aims to eliminate DWL. Consumers pay higher price + producers get lower net price

subsidy

financial assistance given for each unit produces/sold. Decreases cost of production, shifts the supply curve down/right. Increases production until market reaches social optimal quantity. Decreases price for customers, increases price producers receive

public good

nonrival and nonexcludable goods, accessible to the public

nonrival

one person use does not affect the amount available for others (ex: national defense)

nonexcludable

people who don’t pay for a good can still use it (ex: streetlight)

Free rider problem

people have incentive to keep using good w/o paying — private firms cannot profitably produce goods because they can’t collect enough revenue. Market underproduces good = DWL.

Lorenz curve

visual tool used to measure income inequality in an economy

x-axis: cumulative (increasingly) percentage of population (poorest to richest)

y-axis: cumulative percentage of total income

Line of perfect equality - 45° diagonal line, if income were perfectly equal the bottomed 20% of people would earn 20% of total income

Lorenz Curve: ‘bowed’ line below diagonal - the further it curves away from 45° line, more unequal the income distribution is

gini coefficient

statistical measurement of economic inequality (0-1), shows how wealth is distributed in a population. 0 = perfect equality, 1 = perfect inequality (one person has all)

monopoly

only one producer, no close substitutes. Market failure — produce at a not socially optimal quantity (P = MC), maximize profit. Underproduction = DWL. Gov might use antitrust laws/gov ceilings to fix it

natural monopoly

firm can supply entire market’s demand at lower cost than 2+ firms could. High fixed costs, low marginal costs. Gov usually allows natural monopolies to work under regulation.

Socially optimal price (P=MC) — maximizes efficiency but forces firm to take a loss (ATC > P), which requires a gov subsidy

Fair-return price (P=ATC) — compromise where firm earns normal profit + DWL is reduced w/o subsidy

antitrust laws

gov regulations to prevent monopolies from forming/promoting competition in market place. Moves market closer to socially efficient quantity (P=MC)

price fixing

illegal form of collusion - markets agree to set prices than let price be determined by free market. Leads to underproduction + high prices (market failure)

fair return pricing

gov regulation practice for monopolies. price ceiling - P = ATC. Goal to reduce DWL, makes firm earns economic profit