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AP Microeconomics – Eileen Liu

Module 6 Market Failure and the Role of Government

Unit 1 Socially Efficient and Inefficient Market Outcomes

1. Social Efficiency

➢ Social benefit：the total benefit to society, which adds the benefits of

production and consumption enjoyed by other parties to the benefits to

producers and consumers directly transacting

➢ Socially Optimal Quantity：the precise level at which the marginal benefit

of consuming the last unit equals the marginal cost of providing that last

unit.

- Whenever there are costs and benefits outside the market, the market

equilibrium will not produce the socially optimal quantity.

- The goal of the government is social efficiency.

➢ Social Efficiency: production at the level in which marginal social benefit

equals marginal social cost.

- Marginal social cost：the cost to society of

the supplier producing another unit of a

good or service, including the cost to the

supplier and anyone else as a result of their

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AP Microeconomics – Eileen Liu

production

- Marginal private cost：the cost just to the supplier of producing another

unit of a good or service, not including the cost to anyone else as a result of

their production

- Marginal social benefit：the value gained by the whole society by the

consumption of an additional unit of a good or service; this includes the

value gained by the consumer plus the value gained by anyone else as a

result of their consumption

- Marginal private benefit：the value gained just by the consumer from

consuming an additional unit of a good or service, not including the value

gained by anyone else as a result of their consumption

➢ For example

- Externalities： a cost incurred or benefit enjoyed outside of the market

- DWL： whenever a market is socially inefficient, the deadweight loss triangle

will point to the equilibrium point formed by the marginal social costs.
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AP Microeconomics – Eileen Liu

2. Exercises
Q1.
a) Draw a market in which there are additional benefits to society beyond what consumers
pay and enjoy.
b) Shade in the area of DWL in this market

Q2. An inexpensive BlueTooth speaker is developed that can be heard from a mile away.
Neighborhoods become a warzone of competing music tastes. Graph this market and
shade the DWL involved

➢ Quiz in PCD
Q1. Which of the following would guarantee maximizing total economic surplus?
A. Production where total revenue is maximized
B. Profit maximization in a monopoly that does not price discriminate
C. Consumption at a level at which the marginal benefit equals the marginal
production cost of that unit
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AP Microeconomics – Eileen Liu

D. An oligopoly with no dominant strategy and no cooperation between the individual

firms
E. Production where marginal cost is zero

Q2. A perfectly competitive market is in long-run equilibrium. It is allocatively efficient if

A. the government intervenes to correct for any possible undesirable outcomes
B. the marginal social cost equals the marginal social benefit for the last unit produced
C. the average total cost equals the marginal cost and marginal revenue
D. there are low barriers to entry into the market
E. costs outside the market equal costs inside the market

Q3. Which of the following accurately describes what makes a monopolistically competitive
market allocatively inefficient?
A. Private businesses have a price in excess of their marginal cost of production.
B. Production occurs where the average total cost is not at its minimum.
C. Short-run profits still diminish to normal profits in the long run, forcing some firms
out of the market.
D. Long-run supernormal profits inadequately incentivize entrepreneurship and
innovation.
E. Firms are unable to charge the equilibrium price, leading to deadweight loss.

Q4. Whenever production costs to a private business do not equal the total costs to the
whole community, which of the following will occur without government intervention?
A. No economic surplus
B. A shortage of the good
C. Productive inefficiency
D. Market disequilibrium
E. Allocative inefficiency

Q5. At which of the following price and quantity

levels would the unregulated market clear?
A. P1 and Q1
B. P1 and Q2
C. P2 and Q1
D. P2 and Q2
E. Indeterminate
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AP Microeconomics – Eileen Liu

Q6. Which of the following government

interventions could produce a socially efficient
market outcome?
A. A price floor at $6
B. A price ceiling at $4
C. A $2 per-unit subsidy
D. A $2 per-unit tax
E. A 100-unit quota

Q7. Which of the following would entail

deadweight loss?
A. Symmetrical information between consumers and producers
B. A perfectly-price discriminating monopoly
C. Perfect competition with no externalities
D. Shortage of a good
E. Normal profits in a competitive long-run equilibrium

Q8. What do externalities, oligopolies, and product market surpluses have in common?
A. Inefficiency or market failure
B. Normal or zero economic profits
C. Supernormal profits
D. Negative profits
E. Collusion