hi everybody J breed here from reviewe eon.com today we're going to be looking at unit six for microeconomics this one is all about market failures and government intervention this video goes alongside the total review booklet from reviewe eon.com if you want to pick up yourself a copy head down to the links below let's get into the content Here We Go Again first thing I'm going to do is talk about allocative efficiency you already learned about allocative efficiency in previous units allocative efficiency means that we are producing where the marginal benefit equals the marginal cost in this unit we're not just going to focus on the marginal cost generally and the marginal benefit generally we're going to be looking at the marginal social benefit that's the benefit of a product to the entire economy not just for the people buying it but for anybody else that benefits may fall upon the other thing we're going to do is look at the marginal social cost that's the marginal cost not just for the people producing the product but for anybody sket in society that may face cost as a result of this product the true allocative efficient outcome is where the marginal social benefit equals the marginal social cost here's what it looks like on the graph we have our marginal social cost that's upward sloping we have our marginal social benefit that's downward sloping and we can see that at low quantities the marginal social benefit of this product is greater than the marginal social cost that means we are under producing this product and we're going to have some dead weight loss we can find that dead weight loss loss by finding the marginal social cost of that quantity going up till we hit the marginal social benefit of that quantity and then finding the allocatively efficient point where marginal social benefit equals marginal social cost that gives us a triangle right there of dead weight loss from under producing this product at higher quantities we have the marginal social cost is greater than the marginal social benefit now we are overproducing this product and there we can find some dead weight loss by finding the marginal social cost of that quantity the marginal social benefit of that quantity and then our third point for our dead weight loss triangle is where the marginal social benefit equals the marginal social cost that's our triangle of dead weight loss right there from over production if we produce here at Q3 that is where marginal social cost equals marginal social benefit that is our allocatively efficient quantity of output here allocative efficiency is often called socially optimal we're going to quickly go over some of the places where you will see socially optimal output in graphs you've seen before so in a market with no externalities the socially optimal output is equilibrium that's where quantity supplied equals quantity demanded for a firm with no externalities the marginal social cost equals marginal social benefit is found where the price equals the marginal cost for a perfectly competitive firm with no externalities they are always allocatively efficient because they price at marginal cost for a monopoly or monopolistically competitive firm where price equals marginal cost cost that is the allocatively efficient outcome right there now as you know monopolistically competitive firms and monopolies do not price at marginal cost they have price greater than marginal cost and as a result there's dead weight loss now most of that you should already be aware of because you learned it in previous units next we have externalities an externality is when there are benefits or costs that fall on people who aren't the producers or the consumers of a product externalities can come from the production or the consumption of a particular good if if we have externalities in production those are where the spillover costs or benefits come from the production of a good a negative externality in production is something like pollution at a factory a positive externality in production could be safety training programs that lead to Greater safety for the rest of society we can also have externalities in consumption as well and that's when the spillover costs or benefits are created by the consumption of a particular product the consumption of cigarettes lead to secondhand smoke and unsightly cigarette butts that are littered across our society and those are negative externality in consumption we also have positive externalities in consumption from vaccines through her immunity vaccines can give some protection to people who don't get the vaccine and that's a positive externality in consumption so next we're going to talk about negative externalities in more detail a negative externality is when there's a spillover cost to people who don't buy or produce a product Factory pollution is a negative externality traffic congestion or the pollution from cars as well as unpleasant smells that are emitted from a factory or household those are all negative costs that fall on society when they haven't produced or bought the product at hand now we're going to graph a negative externality in production since the producers of this product are the ones creating the negative externality the demand curve is going to be our marginal private benefit and marginal social benefit curve but the supply curve is going to be only the marginal private cost curve the external cost created by the production of this product will be added to that marginal private cost curve to give us a higher marginal social cost curve QE is our mark Market quantity we're going to get without any government intervention but qo where the marginal social cost equals the marginal social benefit is the socially optimal or allocatively efficient quantity at QE we have that point of our marginal social benefit up above we have the marginal social cost of that quantity and where the marginal social cost equals the marginal social benefit we have our allocatively efficient Point those three points give us a triangle of dead weight loss created by this negative externality in production you could also be asked to draw a negative externality in consumption and then we will actually subtract the marginal external cost from the marginal private benefit curve or the demand curve when we do that our marginal social benefit Curve will be below the demand curve QE will be our Market quantity without any government intervention but where marginal social benefit equals marginal social cost we will find our socially optimal quantity labeled qo there at our Market quantity we have that point of marginal social benefit up above we find our marginal social cost point and where marginal social benefit equals marginal social cost we have our allocatively efficient Point those three points give us our triangle of dead weight loss created by this negative externality in consumption when it comes to correcting for negative externalities the government's going to need some intervention the government could place quantity restrictions on the production of this product the government could issue pollution permits to the producers of this product or they could Levy a per unit tax on this product for the AP macroeconomics exam the preferred method is a per unit tax and when we place that per unit tax on the producers of this product if we have a negative externality in production and that tax is equal to the marginal external cost which of course is the gap between the marginal social cost and the marginal private cost curves that will shift our supply curve the vertical distance of that tax making the Supply Plus the tax curve equal to the marginal social cost curve and then qo will be our after tax quantity PT will be the price the consumers pay after the tax PS is the price that producers receive after the tax and that per unit tax will eliminate dead weight loss if it's equal to the marginal external cost the government could also place this tax on the consumers of this product and that would shift the demand curve instead either way if it's the amount of the external cost qo will be our new after tax quantity we can also have positive action alties as well and that's when we have external benefits as a result of a good vaccinations Renovations in your neighborhood or security cameras that are placed nearby all of these produce positive benefits to people who don't buy or produce a product if we want to graph out a positive externality in consumption we have our downward sloping demand curve and upward sloping supply curve since this positive externality is created by the consumers of this product our supply curve will be equal to the marginal social cost and the marginal private cost the downward sloping demand curve is only equal to the marginal private benefit here and since the consumers of this product are the ones making the external benefit we're going to add that external benefit to the demand curve that will give us a new higher marginal social benefit curve above the demand where the marginal social benefit equals the marginal social cost we find our socially optimal quantity labeled qo there but at the market quantity labeled QE there is our marginal social cost point up above we find our marginal social benefit point for the quantity we get in the market and there we find our allocatively efficient point where marginal social benefit equals marginal social cost those three points give us a triangle of dead weight loss as a result of under producing this product because of the positive externality if we have a positive externality in production we're going to take that external benefit and subtract it from the marginal private cost curve that's going to give us a new lower marginal social cost curve and where that marginal social cost equals the marginal social benefit we find our socially optimal quantity labeled qo at that point we find our marginal social cost up above we find our marginal social benefit for the market quantity and there is our allocatively efficient point where marginal social cost equals marginal social benefit once again those three points give us a triangle of dead weight loss created from this positive externality in production when it comes to correcting for positive externalities a per unit subsidy is the preferred method if we give that per unit subsidy to the consumers of this product and that subsidy is equal to the external benefit then the subsidy will equal the gap between the marginal private benefit and that marginal social benefit curve that subsidy will shift the demand curve to the right the vertical distance of that subsidy making the demand plus the subsidy equal to the marginal social benefit curve and then the socially optimal quantity of qo is what we will get within this Market PC is the outof pocket cost to Consumers as a result after the subsidy and PS is the price that producers receive after the subsidy and as a result of this per unit subsidy the dead weight loss will be eliminated the government could also give this subsidy to the suppliers of this product and that will shift the supply curve to the right vertical distance of that subsidy but either way we will get a new after subsidy quantity of qo that's of course if the subsidy is equal to the external benefit of this product the next topic we're going to look at is public goods first we're going to learn how to classify different types of goods and the first aspect is whether or not we can have shared consumption rival is a term you need to know rival goods are types of goods that are reduced in quantity as they are consumed a doughnut is a good example of that as I eat donuts there are less Donuts available for future consumers of those duts non-rival goods on the other hand are not diminished in quantity as more is consumed music streaming services like Spotify or Pandora are non-rival Goods when I listen to music there isn't less music available for the next Consumer you can also classify Goods based on their excludability an excludable good means that it is possible to prevent somebody from consuming a product if they don't purchase that product an example of an excludable good might be a concert that is in an auditorium that requires a ticket to get into you can't get the ticket without paying for it non-excludable Goods on the other hand are Goods that can be consumed whether or not you pay for those goods Goods an example of that might be a public display of fireworks that are in your neighborhood you can see those fireworks without paying for them when it comes to market failures we have a free rider problem that's when people enjoy the benefits of a good without paying for that good non-excludable Goods have a free rider problem when it comes to those public displays of fireworks I can enjoy the fireworks by just standing outside the gate and watching the sky I don't have to pay a thing and as a result of the Free Rider problem Goods that are non-excludable will be underproductive for people to buy the product resulting in lower demand than we would like now when it comes to classifying public goods public goods have two qualities they are both nonrival and non-excludable National Defense is an example of a public good but make sure you understand those two qualities they are non-rival that means they can be consumed without reducing the amount available and they are non-excludable when it comes to the military you can't bar people from being protected when they don't pay their taxes and at the same time when I'm protected by the military my neighbor is not less protected as a result these are called public goods and if left to the free market public goods will be under produced and that's why they are a market failure the next topic we're going to look at is the impact of government controls you've already learned most of this in previous units here's the impact of a subsidy on a market it shifts the supply curve to the right driving down the price and increasing the equilibrium quantity a per unit tax on the other hand shifts that supply curve to the left increasing the price and decreasing the quantity of output if the government imposes a lump sum tax that's a flat amount of tax for being a producer that will shift the average total cost curve upward it won't change the price from the market and it won't change the quantity at least not in the short run if on the other hand the government imposes a per unit tax that will shift that marginal cost upward along with the average total cost here we actually see a reduction in the quantity produced now an aspect of government controls that you might not have learned in previous units we're looking at what are called natural monopolies natural monopolies capture economies of scale and they have constantly decreasing average total costs this is just one way to draw a natural monopoly there are others but here is the unregulated price at pu there with the unregulated quantity of qu we have dead weight loss here and it's a lot natural monopolies when unregulated will produce a lot of dead weight loss one way of regulating a natural monopoly would be to impose a price cealing at the socially optimal price that would be where price equals marginal cost you find it right there po that's the price that is optimal for society and that will give us qo for our output we have no dead weight loss but this firm is losing money you can see that the average total cost is above the demand curve there at qo if the government imposes this price ceiling and expects this firm to stay open for business it's going to need to offer The Firm a lumpsum subsidy equal to that economic loss alternative to the socially optimal price cealing which requires a lump sum subsidy some governments may offer a fair return price a fair return price is when you put a price ceiling at at the average total cost there that's where you find it where the average total cost intersects the demand curve that gives us qf at the fair return price ceiling here we do have some dead weight loss but it is much less than it was when we had an unregulated natural monopoly as an alternative to price ceilings sometimes the government will just regulate monopolies through anti-rust legislation it encourages competition it limits Monopoly Power And in regards to oligopolies it prevents collusion those are some some ways to deal with the Monopoly power problem the last topic we're going to look at is income inequality we have one more graph that is in this microeconomics class and it's called the Loren curve the Loren curve measures income distribution we have the share of income as a percentage on the Y AIS there we have the cumulative percentage of households down there on the Y AIS we also have a 45° angle line there that is called the line of equality the closer the Loren's curve is to to that line of equality the more equal the distribution of income is within this economy the further away the Loren curve is from that line of equality the less equal the income distribution is for that economy we can use this graph to create What's called the genie coefficient the genie coefficient is a ratio of a divided by A+ B you don't need to know how to calculate that necessarily but be aware of where it comes from a genie coefficient of one means means that the economy has complete inequality one household owns all of the wealth a genie coefficient of zero is complete equality all income is evenly distributed of course neither of those extremes ever existed the fact is all economies fall somewhere in between for the United States in 2016 our Genie coefficient was. 414 One impact on income distribution is taxes you can categorize taxes based on the percentage of income they take take from the citizens regressive taxes take a lower percentage of income from the rich and a higher percentage of income from the poor an example of a regressive tax in the United States is sales tax it's a higher percentage of income for the poor than it is for the rich Progressive taxes on the otherand take a higher percentage of income for the rich and a lower percentage of income for the poor United States income taxes are a progressive tax structure the last type of tax is a proportional tax that is the same percentage from everyone regardless of income now you can see the impact of those taxes on income distribution by applying it to the Loren curve a proportional tax since it's the same percentage from all income it doesn't tend to move the Loren curve when it comes to Progressive taxes since they take a higher percentage of income from the rich and a lower percentage from the poor it will tend to shift the Loren curve inward bringing us closer to the line of equality regressive taxes on the other hand since they more heavily impact the poor than the rich it will shift the Loren curve outward making the income distribution less equal we got through it that was a lot of information there and if you knew it all you are on your way to acing your next exam if you need a little more help head down to the links below where there are lots of games and activities from reviewe eon.com to help you study and practice the skills you need for that next exam if you want to support this channel make sure you like And subscribe and then head over to reviewe eon.com and pick up the total review booklet with everything you need to know to pass your final exam or AP economics exam thank you very much I'll see you guys next time