1. AP Economics October 14, 2014 1.Review Activity 2-7: Ceilings and Floors 2.Lesson 2-8 (part 1): Property Rights, Market Failure, and Deadweight Loss 3.HW: Activity 2-8

2. Lesson 2-8 Property Rights: Ownership (maintenance & rights to proceeds) and control over a resource or a commodity. Cornerstone of an effective market economy. When individuals own resources, they have incentives to allocate those resources to their most highly valued uses. Q: Homeowner vs. Renter If property rights to resources are not clear, the market can produce a quantity that is different from the Socially Optimal Quantity. Remember, Equilibrium quantity in a competitive market is determined by the intersection of S and D curves.

3. Lesson 2-8 Marginal Private Benefit (MPB): Marginal benefit enjoyed by an individual in actually consuming a good. MPB = Demand Curve Marginal Social Benefit (MPB): Additional benefit of an activity as viewed by society Expressed as the sum of marginal external benefit (MEB- positive byproducts) and marginal private benefit. Creates a positive Externality: A consequence of an economic activity that is experienced by unrelated third parties.

4. Lesson 2-8 Marginal Private Costs (MPC): Marginal cost incurred by a business in actually producing a good. MPC = Supply Curve Marginal Social Costs (MSC): Extra cost of an activity as viewed by the society Expressed as the sum of marginal external cost (MEC- Negative byproducts) and marginal private cost. Creates negative externality.

5. Lesson 2-8 BUSINESSES PRODUCE WHERE MPB=MPC TO MAXIMIZE TOTAL PROFIT! FROM SOCIETY’S PERSEPCTIVE, THE SOCIALLY OPTIMAL OUTPUT IS MSC = MSB!

6. Lesson 2-8 Continued Market Failure: Externalities Deadweight Loss: The costs to society created by market inefficiency (When MSC DOES NOT Equal MSB) The Value of things that should have been done… Lets Draw… - Externality on Production 1.You play loud music at night 2.You drive to work causing extra traffic and pollution + Externality on Consumption 1.Your teacher’s education 2.You walk to work limiting pollution + Externality on Production 1.You bake cookies 2.A new airport is build near your home - Externality on consumption 1.You smoke cigarettes