AP Micro Unit 6 Vocab

socially efficient

the level of output that maximized the net gains for society by equating the marginal social cost and the marginal social benefit

socially optimal quantity

 the quantity that society would choose, taking all costs and benefits into account

asymmetric information

 when the parties involved in a transaction (buyers & sellers) hold different information

external cost

a cost that an individual or firm imposes on others without compensating them (aka negative externalities)

external benefit

 a benefit that an individual or firm confers on others without receiving compensation (aka positive externalities)

market failure

occurs when the outcome in a market is inefficient

marginal private benefit

the marginal benefit that accrues to consumers of a good, not including any external benefits

marginal external benefit

the addition to external benefits created by one more unit of the good

positive consumption externality

positive externality created by the consumption of a good/service (know reverse too)

positive production externality

positive externality arising from the production of a good/service (know reverse too)

transaction costs

the costs to individuals of making a deal

coase theorem

 states that payment between private parties can achieve an efficient solution to externality problems as long as the transaction costs are sufficiently low

excludable

the supplier of that good can prevent people from consuming the good unless they pay for it

rival in consumption

if the same unit of the good cannot be consumed by more than one person at the same time

private good

A good that is both excludable and rival in consumption

nonexcludable

a supplier cannot prevent consumption by people who do not pay for it

nonrival in consumption

 if more than one person can consume the same unit of the good at the same time

free-rider problem

individuals have no incentive to pay for their own consumption and instead will “free-ride” on anyone who does pay

public good

is both nonexcludable and nonrival in consumption

common resource

is nonexcludable and nonrival in consumption: you can’t stop others from consuming the good, and when they consume it, less of the good is available for you. 

artificially scarce good

a good that is excludable but nonrival in consumption

pigouvian tax

taxes designed to correct for the inefficiencies of external costs

pigouvian subsidy

a payment designed to correct for the inefficiencies of external benefits

marginal cost pricing

occurs when regulators set a monopoly’s price equal to its marginal cost to achieve efficiency

average cost pricing

occurs when regulators set a monopoly’s price equal to its average cost to prevent the firm from incurring a loss

poverty threshold

the minimal annual income that is considered adequate to purchase the necessities of life

poverty rate

the % of the population with incomes below the poverty threshold

compensating differentials

wage differences across jobs that reflect the fact that some jobs are less pleasant or more dangerous than others

unions

organizations of workers that try to raise wages and improve working conditions for their members by bargaining collectively

efficiency wages

wages that exceed the market equilibrium rate that employers use to motivate hard work and reduce worker turnover

Lorenz curve

shows the % of all income received by the poorest members of the population, from the poorest 0% to the poorest 100%

Gini coefficient

a number that summarizes a country’s level of income inequality based on how unequally income is distributed

in-kind benefit

a benefit given in the form of goods/services

negative income tax

a program that supplements the income of low-income workers