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AP Microeconomics
Unit 6: Market Failure and the Role of Government
6.1 Socially Efficient and Inefficient Market Outcomes
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Cards (45)
What is social efficiency in economics?
Maximizing total societal welfare
Social efficiency occurs when resources are allocated to maximize the combined consumer surplus and
producer
surplus.
Social inefficiency arises when resources are optimally allocated, leading to increased societal welfare.
False
When does social efficiency occur in terms of marginal social benefit (MSB) and marginal social cost (MSC)?
MSB equals MSC
The concept of social efficiency considers externalities that affect society as a
whole
.
What are the main causes of market failure?
Externalities, public goods, asymmetric information, monopoly power
A factory's pollution, which harms nearby residents, is an example of a negative
externality
.
Microsoft's dominance in operating systems is an example of monopoly power causing
market failure
.
What are the sources of market inefficiency?
Externalities, public goods, asymmetric information, monopoly power
Market failure occurs when the free market fails to allocate resources
efficiently
.
Public goods are excludable and rival, leading to efficient allocation by the market.
False
What are the main methods of government intervention to address market failures?
Regulations, taxes, subsidies, direct provision, public ownership
Taxing carbon emissions is an example of using taxes to address negative
externalities
.
Direct provision by the government ensures access to essential services but may be less efficient than
private provision
.
What is the primary goal of government policies in addressing market failures?
Correct inefficiencies
The government uses regulation to address externalities and
monopoly
power.
Taxation and subsidies can be used to internalize
externalities
.
What type of goods does the government provide to ensure adequate supply?
Public goods
The government provides information to mitigate
asymmetric
information.
Match the government intervention method with its purpose:
Regulation ↔️ Correct externalities and monopoly power
Taxation/Subsidies ↔️ Internalize externalities
Public Goods Provision ↔️ Ensure supply of non-excludable goods
Information Provision ↔️ Reduce asymmetric information
Emission standards for factories are an example of
government regulation
.
A carbon tax is an example of government taxation to internalize a negative
externality
.
What is an example of the government providing a public good?
Funding national defense
Imposing a carbon tax shifts the market towards
social efficiency
.
Social inefficiency occurs when market outcomes fail to maximize total social
welfare
.
What are externalities in market transactions?
Costs or benefits to third parties
Positive externalities lead to the
underproduction
of goods.
What is the purpose of a carbon tax imposed by the government?
Reduce pollution
Social inefficiency occurs when market outcomes fail to maximize total social
welfare
When negative externalities exist, firms tend to underproduce goods because they bear the full social costs.
False
What is an example of a negative externality?
Factory polluting a river
What is an example of a positive externality?
Individual getting vaccinated
Social efficiency is achieved when resources are allocated to maximize the combined consumer and producer
surplus
What two conditions must be equal for social efficiency to be achieved?
MSB and MSC
Social efficiency builds upon economic efficiency by considering
externalities
.
Market failure occurs when the free market fails to allocate resources
efficiently
What is an example of a market failure caused by externalities?
Pollution from a factory
What is a characteristic of public goods that leads to underproduction in the market?
Non-excludable and non-rival
What type of market failure arises from asymmetric information?
Used car sales
Monopoly power can lead to higher prices and lower
output
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