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AP Microeconomics
Unit 5:
The Role of Government
12-18% of AP Micro Exam
Unit Exam: 1/13 & 1/14
What is the difference between a public good
and a private good?
Exclusion (denied access unless you pay) vs. Non-Exclusion
(everyone can use, cannot exclude benefits for those who do not
pay)
Public Good: Shared consumption (nonrivalrous) One person’s
consumption of a good does not reduce the usefulness to
others
vs.
Non-shared consumption (rival good)
A true public good is non-rival (shared consumption) and nonexcluding
Some Examples
1. Hamburger:
2. Exclusion & Rival
3. TV Show:
4. Exclusion but Nonrival
5. Park:
6. Nonexclusion and Nonrival
7. College Education
8. Exclusion but Nonrival
9. National Defense
10. Nonexclusion and Nonrival
What is a free-rider?
Someone who uses the good but
doesn’t pay for it.
Free riders occur when there
are non-exclusion and shared
consumption (public goods)
Spraying for mosquitoes
Police & fire protection
National defense
Street lights
Externality
•When one’s actions
impose a cost or benefit on
the well-being of a 3rd
party.
•Externalities result in
market failure.
1) Positive: external
benefit is imposed on
someone (CASUES
UNDERPRODUCTION)
(examples: gardens,
restored historic
buildings, research)
2) Negative: external
cost is imposed on
someone (CAUSES
OVERPRODUCTION)
(examples: exhaust
from autos, barking
dogs, noise from
airplanes)
Let’s See What You Got…
• From memory, create a detailed correctly
labeled graph detailing a positive
externality. Accurately label all curves and
deadweight loss.
• Now draw a negative externality graph.
Follow the above instructions.
January 8, 2013
1. Review parts A,B,C from packet
2. Notes: Per-Unit or Lump Sum
Tax/Subsidy to correct externalities & the
Coase Theorem
3. HW: Parts D and E from Activity 5-2
(tax/subsidy) and all of Activity 5-3
(Coase Theorem)
Taxes and Subsidies
•
•
•
•
•
•
•
•
•
Per-Unit vs. Lump-Sum
Parallel logic between subsidies
and taxes.
Per-Unit policies affect firm’s
MC, so output would be
affected.
Per-Unit policies also affect
AVC and ATC curves by shifting
them upward.
AFC not affected!
Per-Unit policies lessen output
and quantity
Lump-Sum policies affect firms
TFC curves, therefore affecting
AFC and ATC curves.
Firm’s output (MR=MC) remains
the same!
Lump-Sum policies reduce
firm’s total profit but do not
reduce quantity.
Profit-Maximizing Firm in Perfect Competition
Coase Theorem
•Remember, externalities lead to inefficiency…
•Can disputes causes by externalities be
solved privately?
•The proposition that, in a conflict of property
rights, if private parties can bargain without
cost over the allocation of resources, they
can solve the problem of externalities on their
own.
January 9, 2014
1. Review HW (Activity 5-2 parts D and E
and Activity 5-3 on Coase Theorem)
2. Continue Unit 5 Notes: Taxation
3. HW: All of Activities 5-4 (Economic
Efficiency dealing with Externalities),
5-5 (Taxation) and 5-6 (Income Tax)
2 Principles of Taxation
• Benefits-Received Principle
• Those who benefit for services provided by
the government should be the ones who
pay for it
• VS.
• Ability-to-Pay Principle
• Individuals/Businesses with larger
incomes should pay more taxes.
Tax Classification
•
1.
2.
3.
•
•
•
3 of them:
Progressive: Person with higher income pays larger % of income in taxes than
person with smaller income. (Income tax)
Proportional: Everyone pays same % of income in taxes regardless of income.
Regressive: Person with lower income pays larger % of their income in taxes
than person with higher income (gas tax, sales tax)
Tax Incidence: Reveals which group, the consumers or producers, will pay the
price of a new tax.
When supply is more elastic than demand, the tax burden falls on the
buyers. If demand is more elastic than supply, producers will bear the cost
of the tax.
Example: the demand for cigarettes is fairly inelastic, which means that
despite changes in price, the demand for cigarettes will remain relatively
constant. Let's imagine the government decided to impose an increased
tax on cigarettes. In this case, the producers may increase the sale price
by the full amount of the tax. If consumers still purchased cigarettes in the
same amount after the increase in price, it would be said that the tax
incidence fell entirely on the buyers.
January 10, 2013
1. Finish Unit 5 Notes: Income Inequality and the
Lorenz Curve
2. Last AP Micro Assignment: Activity 5-7
3. Q & A/Review HW, etc.
Income Inequality and Distribution of
Wealth
Income Inequality
Some households earn more income than
others…
In 2012, the average American earns roughly
$52,000.
What’s wrong with using the average?
How does the government
measure distribution of
income?
THE LORENZ
CURVE
The LAST
AP Micro
graph to
learn!!!!
The Lorenz Curve
Percent of Income
100
80
Perfect Equality
60
40
20
0
20
40
60
80
Percent of Families
100
The Lorenz Curve
Percent of Income
100
Lorenz Curve
(actual distribution)
80
Perfect Equality
60
55
40
30
20
15
5
0
20
40
60
80
Percent of Families
100
The Lorenz Curve
Percent of Income
100
Lorenz Curve
(actual distribution)
80
Perfect Equality
60
55
40
The size of the
banana shows
the degree of
income inequality.
30
20
15
5
0
20
40
60
80
Percent of Families
100
20
The Lorenz Curve
Percent of Income
100
After Distribution
80
Perfect Equality
60
55
40
The banana gets
smaller when the
government redistributes income
30
20
15
5
0
20
40
60
80
Percent of Families
100
21
Gini Coefficient
The Gini coefficient is equal to the
area marked A
divided by the sum of the areas
marked A and B.
that is, Gini = A / (A + B).
GREAT
NEWS…
YOU ARE DONE WITH
AP MICRO!!!!
23

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