AP Microeconomics Notes

Chapter Outlines

Chapter 7: Government and Public Sector

Basic Concepts
1. Externalities
  1. Some of the benefits or costs of a transaction accrue to the public as social costs or benefits
  2. Positive externality
    1. what the government should do- grant a subsidy to private producers in order to continue production for this positive externality
  3. Negative externality
    1. the government should impose a tax to improve economic efficiency
    2. often used for pollution
2. Social Costs, Private Costs, and Externalities
  1. Social costs
    1. equal to private costs and the value of externalities
    2. MSC > MC since marginal social costs incorporate marginal private costs
    3. MPC or MC – marginal social costs
    4. MSC – marginal social costs
3. Definitions and Nature of Efficiency
  1. Efficiency- a condition in society where any further improvement in well being for some people will come at the expense of others
4. Public Goods and Private Goods
  1. Private goods
    1. exclusive and distributive
    2. one can be excluded from the benefits by not being willing or able to pay the price
  2. Public goods
    1. nonexclusive and nondistributive
    2. marginal cost of one more public good equals zero
    3. congestible public goods
      1. ex: a roadway may be a public good until rush hour
5. Other Roles of Government
  1. Antitrust for monopolies
  2. Provision of information
  3. Redistribution of income
Measure of Efficiency
1. Technological Efficiency
  1. The identification of those inputs that have the greatest impact on outputs per dollar of input expenditure
2. Allocative Efficiency
  1. The channeling of resources to their most productive and desired uses
3. Pareto Efficiency
  1. The optimal point (efficient point) for society when any further improvement for some comes at the expense of others
Quasi-Public Goods
1. Definition
  1. Public goods that have some private good characteristics
2. Contestable Public Goods
  1. Example:
    1. a public highway becomes crowded at rush hour
    2. at non rush hours, one more car on the highway would not interfere with the normal speed of other cars on it
    3. at rush hour, one more car lowers the speeds of all others
3. Price-Excludable Public Goods
  1. Example:
    1. the government makes a provision for medical insurance for the elderly
    2. the co-payments exclude some lower-income elderly from some or all of the benefits of medical insurance and care
Bases for Public Goods or Government Interference with Market Outcomes
1. Market Failure
  1. Failure of the market mechanisms to achieve optimal or efficient outcomes
    1. efficient social outcome: when MSB = MSC
    2. MSB – marginal social benefits
    3. MSC – marginal social costs
  2. The buyer and seller are not able or willing to agree on the terms of the transaction
    1. the market fails to clear the market of any surplus or shortage
2. Externalities
  1. In the event of a negative externality
    1. the government tax should be equal to the social cost in order to internalize the cost to the firm with is producing the negative externality (ex. pollution)
  2. In the event of a positive externality
    1. the government subsidy should be equal to the value to society of the greater number of (ex. prenatal visits)
Other Bases for Government Interference
1. Information
  1. Including it would be of benefit to the consumers, but not the suppliers
  2. Examples:
    1. price per unit information, nutrition facts, warnings
2. Meritorious Nature
  1. Some goods may be of such a meritorious nature as to transcend any economic criteria in the determination of public goods
  2. Example: health care
3. Efficient Allocation of Resources
  1. If:
    1. the ratio (Public Good Benefits / Public Good Costs) is greater than 1 and greater than (Private Good Benefits / Private Good Costs)
  2. Then:
    1. the good should be produced or provided by public means
4. Income Redistribution
  1. Based on normative judgments
5. Competitive Markets
  1. The government may use the FTC to correct or penalize firms that provide deceptive sales techniques that promote unfair competition
  2. FTC – Federal Trade Commission
6. Stabilization
  1. Goals
    1. curb inflation
    2. stabilize the business cycle (promote growth without serious or prolonged contraction or recession)

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Aboukhadijeh, Feross. "Chapter 7: Government and Public Sector" StudyNotes.org. Study Notes, LLC., 12 Oct. 2013. Web. 18 Apr. 2025. <https://www.apstudynotes.org/microeconomics/outlines/chapter-7-government-and-public-sector/>.

AP Microeconomics Notes

Chapter 7: Government and Public Sector

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