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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

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