When markets don't allocate resources efficiently, and what government can do about it. Externalities and the taxes and subsidies that correct them, why public goods get underproduced, and how economists measure inequality.
Six ways to master Unit 6 — pick whichever fits how you like to study.
Five topics from the College Board CED, in order.
Unit 6 asks the question the rest of the course has been building toward: when do markets fail, and what should government do about it? The benchmark is the one established in Unit 3 — a market is allocatively efficient when it produces where marginal social benefit equals marginal social cost, maximizing total surplus.
Market failure is any situation where a free market misses that quantity. The two headline cases are externalities, where costs or benefits spill onto people who aren't party to the transaction, and public goods, which are non-rival and non-excludable and therefore underproduced because everyone can free-ride. In both cases the private market's quantity diverges from the social optimum, and the resulting deadweight loss is what intervention aims to eliminate.
At 8–13% of the exam over roughly 8–10 class periods, this is the smallest unit, but it is graph-heavy and appears frequently on free-response questions. Be ready to draw a negative or positive externality graph, identify the socially optimal quantity, size a corrective tax or subsidy as the vertical distance between the private and social curves, and interpret a Lorenz curve.