#AP Microeconomics: Externalities - Your Last-Minute Guide

Hey there, future econ whiz! Let's break down externalities in a way that's easy to remember and super helpful for your exam. Think of this as your secret weapon for acing those tricky questions. Let's get started! 🚀

#What are Externalities?

An externality is like a side effect of an economic decision that affects someone who wasn't part of the original choice. It's a third-party impact, and it can be either good or bad.

• Key Idea: It's about costs or benefits that spill over to others.

#Types of Externalities

1. Negative Externality: 😠

   • This is when an economic activity creates costs for others. Think of pollution from a factory.
   • Marginal Social Cost (MSC) > Marginal Private Cost (MPC)
   • The market overproduces because firms don't consider the full social cost.

2. Positive Externality: 😊

   • This is when an economic activity creates benefits for others. Think of getting a vaccine.
   • Marginal Social Benefit (MSB) > Marginal Private Benefit (MPB)
   • The market underproduces because consumers don't consider the full social benefit.

#Negative Externalities: The Nitty-Gritty

#Examples

• Pollution: Factories releasing pollutants into the air or water. 🏭
• Secondhand Smoke: Affecting the health of those nearby. 🚬

#The Graph

• MPC (Marginal Private Cost): The cost to the firm of producing one more unit.
• MSC (Marginal Social Cost): The total cost to society of producing one more unit (including external costs).
• MSB (Marginal Social Benefit): The benefit to society of consuming one more unit.
• Free Market Quantity (QFM): Where MPC = MSB (point A).
• Socially Optimal Quantity (QSO): Where MSC = MSB (point B).
• Deadweight Loss (DWL): The area ABC, representing the inefficiency of the free market.

#How to Fix It: Per-Unit Tax

• The government imposes a per-unit tax to make the firm internalize the external costs.
• This shifts the MPC curve leftward to the MSC curve.
• The goal is t...