AP Microeconomics 6.2: Externalities

Analyze how external costs and benefits separate private incentives from social outcomes and create a gap between market and efficient quantities.

[Maximum number: 3]

Anderson Company is a typical firm that manufactures Good G in a constant-cost, perfectly competitive market. Anderson Company is currently earning positive economic profit.

(a)

On your graphs in part (b), show what will happen to each of the following if the market for Good G adjusts to long-run equilibrium.

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(i)

The market equilibrium price and quantity, labeled $\mathrm{P}_{2}$ and $\mathrm{Q}_{2}$ , respectively

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(i) On the market graph from part (a), show a rightward shift in the market supply curve, resulting in a lower market equilibrium price, labeled $\mathrm{P}_{2}$ , and a greater market equilibrium quantity, labeled $\mathrm{Q}_{2}$ .

Figure for Answer to Question (i) — AP Microeconomics

(b)

Assume the production of Good G creates benefits for third parties.

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(i)

Given this situation, will the market equilibrium quantity be greater than, less than, or equal to the allocatively efficient quantity? Explain.

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(ii)

The government takes an action that corrects the externality in the market for Good G. As a result of the government's action, does total economic surplus increase, decrease, or stay the same? Explain.

Begin your response to this question at the top of a new page in the separate Free Response booklet and fill in the appropriate circle at the top of each page to indicate the question number.

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Covered syllabus points

6.2 Externalities question 1

Question (a)

Question (i)

Question (b)

Question (i)

Question (ii)