AP®︎ Microeconomics: Topic 6.2 Flashcards

A side effect of production or consumption that affects third parties outside the market.

Positive creates external benefits; negative creates external costs for people not directly involved.

MPC is the producer's extra cost; MSC includes MPC plus any external cost.

MPB is the consumer's extra benefit; MSB includes MPB plus any external benefit.

The output where marginal social benefit equals marginal social cost, maximizing total surplus.

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.

Negative externalities cause overproduction; positive externalities cause underproduction relative to the social optimum.

The lost total surplus caused when market quantity differs from the socially efficient quantity.

Decision-makers respond to their own costs and benefits, not spillover effects on others.

People have an incentive to benefit without paying when a good is non-excludable.

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.