AP®︎ Microeconomics: Unit 6 Flashcards
Master key terms and definitions for Unit 6 of AP Microeconomics – Market Failure and the Role of Government to help you prep for quizzes and the AP exam.
Marginal Social Cost
The additional cost to society from producing one more unit, including external costs.
The additional cost to society from producing one more unit, including external costs.
A situation where the market equilibrium quantity is not socially efficient.
The ability of a firm to influence price, output, or other market conditions.
Imperfect market structures where firms have pricing power and output may be below the efficient level.
A market condition where one side has better information than the other.
A policy method comparing total social benefits and total social costs of alternative actions.
Competitive markets reach efficient output, while imperfectly competitive markets create deadweight loss.
Policies create efficiency by making private decision-makers face all social costs and benefits.
The sum of consumer surplus and producer surplus, maximized at efficient output.
Efficiency occurs when the last unit’s marginal benefit equals its marginal cost.
A side effect of production or consumption that affects third parties outside the market.
MSC lies above MPC, so market output exceeds the efficient quantity and creates deadweight loss.
MSB lies above MPB, so market output falls below the efficient quantity and creates deadweight loss.
Decision-makers respond to their own costs and benefits, not spillover effects on others.
Government rules that directly limit harmful activity or require specific pollution-control actions.
Government supplies a good or service directly instead of relying only on private markets.
A per-unit tax equal to marginal external cost reduces output toward the socially optimal quantity.
A per-unit subsidy equal to marginal external benefit increases output toward the socially optimal quantity.
Clear property rights and low transaction costs let parties bargain to internalize externalities.
Marginal private benefit is the additional benefit received by direct consumers, while marginal social benefit is the additional benefit to society from one more unit, including any external benefits.
Marginal private cost is the additional cost paid by producers, while marginal social cost is the additional cost to society from one more unit, including any external costs.
Negative externalities cause overproduction because marginal social cost exceeds marginal private cost, while positive externalities cause underproduction because marginal social benefit exceeds marginal private benefit.
Deadweight loss is the lost total surplus caused when market quantity differs from the socially efficient quantity.
An externality is a side effect of production or consumption that affects third parties outside the market. Positive externalities create external benefits, while negative externalities create external costs not reflected in market prices.
An externality is a side effect of production or consumption that affects third parties outside the market. Positive externalities create external benefits, while negative externalities create external costs not reflected in market prices.
The socially efficient or optimal quantity occurs where marginal social benefit equals marginal social cost, maximizing total surplus.
Rival means one person’s use reduces others’ use; excludable means nonpayers can be prevented from consuming.
Goods that are both rival and excludable, usually produced through normal market transactions.
A situation where markets underproduce socially desired goods because private incentives do not match social benefits.
Overuse of a rival, non-excludable resource because individuals act in their own self-interest.
Goods that are excludable but non-rival over some range of use, like streaming services or cable.
Public production funded mainly by taxes because private firms usually cannot profitably supply non-excludable goods.
Government sometimes supplies rival, excludable goods and makes them freely available, such as education.
Resources that are rival and non-excludable, so overuse occurs because access is open.
Goods that are nonrival and nonexcludable, so one person’s use does not reduce others’ use and nonpayers cannot easily be excluded; markets often underprovide them.
When a good is nonexcludable, people have an incentive to benefit without paying, which reduces private incentives to provide the good.
The division of a tax burden between buyers and sellers based on relative elasticities.
They change consumer price, producer price, quantity, surpluses, deadweight loss, and government revenue or cost.
A binding ceiling sets price below equilibrium; a binding floor sets price above equilibrium, with effects varying by market structure.
A single-firm industry with falling average costs needs a fixed subsidy to produce where price equals marginal cost.
Government action that promotes competition by preventing or breaking up anticompetitive market power.
Policies can increase efficiency when they correct the incentives causing market failure.
Per-unit policies change marginal cost, while lump-sum policies change fixed costs only.
Per-unit taxes shift MC, AVC, and ATC up; per-unit subsidies shift them down.
Lump-sum taxes raise ATC and AFC, while lump-sum subsidies lower them.
Regulation can set price at P = MC or ATC to reduce monopoly inefficiency.
An uneven distribution of earnings among individuals or households in an economy.
An uneven distribution of assets such as property, savings, and investments.
The percentage of people whose income falls below the poverty threshold.
A graph showing the cumulative distribution of income or wealth compared with perfect equality.
A number from 0 to 1 measuring inequality, with higher values showing greater inequality.
The extra revenue generated by employing one more unit of a factor of production.
The education, training, skills, and experience that increase a worker's productivity and earnings.
Networks and relationships that provide economic opportunities, information, and support.
Wealth or assets passed from one generation to another.
Unequal treatment based on group identity that limits wages, hiring, or advancement.
The ability to borrow, save, invest, and build wealth through financial institutions.
The ability to move up or down the income or wealth distribution over time.
The ability of workers, firms, or family members to influence wages and income distribution.
Progressive takes a higher share from higher incomes; regressive from lower incomes; proportional the same share from all.
Government payments to individuals without receiving current goods or services in return.
