Transcript File
AP Economics October 14, 2014 1. Review Activity 2-7: Ceilings and Floors 2. Lesson 2-8 (part 1): Property Rights, Market Failure, and Deadweight Loss 3. HW: Activity 2-8 Lesson 2-8 • Property Rights: Ownership (maintenance & rights to proceeds) and control over a resource or a commodity. • Cornerstone of an effective market economy. • When individuals own resources, they have incentives to allocate those resources to their most highly valued uses. • Q: Homeowner vs. Renter • If property rights to resources are not clear, the market can produce a quantity that is different from the Socially Optimal Quantity. • Remember, Equilibrium quantity in a competitive market is determined by the intersection of S and D curves. Lesson 2-8 • Marginal Private Benefit (MPB): Marginal benefit enjoyed by an individual in actually consuming a good. • MPB = Demand Curve • Marginal Social Benefit (MPB): Additional benefit of an activity as viewed by society • Expressed as the sum of marginal external benefit (MEB- positive byproducts) and marginal private benefit . • Creates a positive Externality: A consequence of an economic activity that is experienced by unrelated third parties. Lesson 2-8 • Marginal Private Costs (MPC): Marginal cost incurred by a business in actually producing a good. • MPC = Supply Curve • Marginal Social Costs (MSC): Extra cost of an activity as viewed by the society • Expressed as the sum of marginal external cost (MEC- Negative byproducts) and marginal private cost. • Creates negative externality. Lesson 2-8 • BUSINESSES PRODUCE WHERE MPB=MPC TO MAXIMIZE TOTAL PROFIT! • FROM SOCIETY’S PERSEPCTIVE, THE SOCIALLY OPTIMAL OUTPUT IS MSC = MSB! Lesson 2-8 Continued Market Failure: Externalities • Deadweight Loss: The costs to society created by market inefficiency (When MSC DOES NOT Equal MSB) • The Value of things that should have been done… • Lets Draw… - Externality on Production 1. You play loud music at night 2. You drive to work causing extra traffic and pollution + Externality on Consumption 1. Your teacher’s education 2. You walk to work limiting pollution + Externality on Production 1. You bake cookies 2. A new airport is build near your home - Externality on consumption 1. You smoke cigarettes