AP Microeconomics Pol 3 A a Define Externalities B Explain Using Graphs Where Appropriate How in the Presence of Externalities Private Markets Do Not Questions

Classify positive and negative production or consumption externalities, compare private and social curves, and find market output, efficient output, and deadweight loss.

Exam points

identify an externality as an uncompensated cost or benefit imposed on a third party
classify positive or negative production and consumption externalities from scenarios or graphs
draw or compare MPB and MSB for consumption externalities and MPC and MSC for production externalities
locate private-market output where private curves intersect and efficient output where MSB equals MSC
explain why negative externalities cause overproduction and positive externalities cause underproduction

[Maximum number: 2]

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.

[ 1 ]

(i)

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

[ 1 ]

(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.

[ 1 ]

(i)

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

[ 1 ]

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AP Microeconomics Pol 3 A a Define Externalities B Explain Using Graphs Where Appropriate How in the Presence of Externalities Private Markets Do Not Questions question 1

Question (a)

Question (i)

Question (b)

Question (i)