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Unit 6 · Market Failure & Government Unit Hub Flashcards Cheat Sheet Essentials Visual Review MC Practice FRQ Practice
Unit 6 Visual Review

Unit 6 Visual Review

An 8-slide visual review of Market Failure and the Role of Government — the efficiency benchmark, negative and positive externality graphs, corrective taxes and subsidies, public goods, and the Lorenz curve, built right into the page.

8 slides
Diagram walkthrough
Keyboard navigation
College Board aligned
← Back to Unit 6 hub
UNIT 6 · SLIDE 1 The Efficiency Benchmark Price Quantity D = MSB S = MSC CS PS Qe The efficiency benchmark Total surplus = CS + PS Maximized where marginal social benefit equals marginal social cost: MSB = MSC. What market failure means Any situation where the market lands on a quantity OTHER than the one where MSB = MSC. Either direction hurts Too much OR too little both destroy surplus. Total surplus peaks where MSB = MSC. Every market failure is a story about missing that point. The Review Hub · AP Microeconomics Unit 6
Consumer surplus plus producer surplus is maximized at the quantity where marginal social benefit equals marginal social cost. Market failure means the market settles somewhere else — and the gap between the two quantities is what deadweight loss measures.
UNIT 6 · SLIDE 2 Negative Externalities: The Market Overproduces Price Quantity D = MSB MPC MSC Qmkt Qopt DWL external cost Negative externality MSC = MPC + external cost, so MSC sits ABOVE MPC. Producers ignore the spillover and keep producing past the social optimum. The result Qmkt > Qopt — the market OVERPRODUCES. DWL is the triangle from Qopt out to Qmkt. The fix A per-unit tax equal to the external cost lifts MPC onto MSC — output falls to Qopt. MSC above MPC. The market makes too much, and a tax equal to the spillover fixes it. The Review Hub · AP Microeconomics Unit 6
When production imposes costs on third parties, MSC lies above MPC. Producers respond only to their private cost, so they push past the social optimum. The deadweight loss triangle runs from Qopt out to the larger market quantity.
UNIT 6 · SLIDE 3 Positive Externalities: The Market Underproduces Price Quantity MSC = S MPB = D MSB Qmkt Qopt DWL Positive externality MSB = MPB + external benefit, so MSB sits ABOVE demand. Buyers only count their own benefit, so they stop buying before the social optimum. The result Qmkt < Qopt — the market UNDERPRODUCES. DWL is the triangle from Qmkt out to Qopt. The fix A per-unit subsidy equal to the external benefit lifts MPB onto MSB — output rises to Qopt. MSB above MPB. The market makes too little, and a subsidy equal to the spillover fixes it. The Review Hub · AP Microeconomics Unit 6
When consumption benefits third parties, MSB lies above demand. Buyers count only their own benefit and stop short of the social optimum. Here the deadweight loss triangle runs the other way — from the market quantity out to Qopt.
UNIT 6 · SLIDE 4 Sizing the Correction Match the tool to the spillover — and size it correctly Negative externality → TAX Problem: MSC > MPC, market overproduces. Tool: per-unit (Pigouvian) tax. Size: exactly the per-unit external COST. Effect: supply shifts up onto MSC; Q falls to Qopt. Positive externality → SUBSIDY Problem: MSB > MPB, market underproduces. Tool: per-unit corrective subsidy. Size: exactly the per-unit external BENEFIT. Effect: demand shifts up onto MSB; Q rises to Qopt. Measure the gap at the SOCIALLY OPTIMAL quantity The correct tax or subsidy is the vertical distance between the private and social curves, read at Qopt — not at the market quantity. When the curves aren't parallel these differ, and measuring at the wrong quantity gives the wrong number. Overshooting is its own market failure: too large a tax pushes output BELOW Qopt. The right tax or subsidy equals the per-unit spillover, measured at the socially optimal quantity. The Review Hub · AP Microeconomics Unit 6
Tax what produces too much, subsidize what produces too little — and make the correction exactly as large as the externality. Overshooting is its own market failure: too large a tax drives output below the optimum and recreates deadweight loss.
UNIT 6 · SLIDE 5 Four Goods, Two Questions Two questions classify every good EXCLUDABLE NON-EXCLUDABLE RIVAL NON-RIVAL Private good pizza, shoes markets work fine Common resource ocean fisheries OVERUSED Club good streaming, toll road markets can supply PUBLIC GOOD national defense UNDERPRODUCED Free riding Non-excludability is the fatal trait. If non-payers can't be shut out, everyone waits for someone else to pay. Revenue collapses, so the good is underproduced. Rivalry and excludability classify every good — and non-excludability is what breaks the market. The Review Hub · AP Microeconomics Unit 6
Ask whether a good is rival and whether it is excludable. Non-excludability is the trait that causes trouble: it lets people free-ride, which is why public goods are underproduced and common resources are overused.
UNIT 6 · SLIDE 6 Measuring Inequality Cumulative % of income Cumulative % of households perfect equality Lorenz curve A B Reading the Lorenz curve Households are ordered poorest → richest. The 45° line is perfect equality. The further the curve SAGS, the more unequal. The Gini coefficient Gini = A ÷ (A + B) 0 = perfect equality · 1 = perfect inequality Watch the direction A LOWER Gini means a MORE equal distribution. The further the Lorenz curve sags from the 45° line, the higher the Gini and the greater the inequality. The Review Hub · AP Microeconomics Unit 6
The Lorenz curve plots cumulative income share against cumulative population share. The Gini coefficient turns the gap between that curve and the equality line into a single number from 0 to 1 — and a lower Gini means more equality.
UNIT 6 · SLIDE 7 When Government Helps and When It Hurts Government tools — and their side effects Fixing market failure • Corrective taxes on negative externalities • Corrective subsidies on positive externalities • Public provision of public goods, via taxation • Antitrust and regulation against market power Creating new inefficiency • Binding price ceiling → shortage • Binding price floor → surplus • Tax in a market with NO externality → DWL • Corrective tax larger than the spillover → DWL The honest summary Market failure is a reason to CONSIDER intervention, not proof that intervention will help. A policy improves efficiency only if it moves output toward the quantity where MSB = MSC. Policies that overshoot, or that target an efficient market, destroy surplus just as surely as the original failure did — the deadweight loss simply appears on the other side. Market failure justifies considering intervention — it doesn't guarantee intervention will improve things. The Review Hub · AP Microeconomics Unit 6
The same toolkit can fix or worsen an outcome. A policy improves efficiency only when it moves output toward MSB = MSC. Binding price controls, mis-sized corrective taxes, and taxes on already-efficient markets all destroy surplus.
UNIT 6 · SLIDE 8 Unit 6 in One Screen Diagnose in three steps 1. Is there a spillover? Cost or benefit? 2. Which curve moves — MSC or MSB? 3. Over- or underproduction? Tax or subsidy? Negative → MSC above MPC → overproduce → tax Positive → MSB above MPB → underproduce → subsidize The graphing checklist ☐ Label BOTH private and social curves ☐ Mark Qmkt where private curves cross ☐ Mark Qopt where MSB meets MSC ☐ Shade DWL between MSB and MSC ☐ Show the tax/subsidy as a vertical gap Four goods, two questions Rival + excludable → private good Rival + non-excludable → common resource (overused) Non-rival + excludable → club good Non-rival + non-excludable → public good (underprovided) Fast self-test • What makes an outcome efficient? • Which externality causes overproduction? • How big should the corrective tax be? • Does a lower Gini mean more or less equality? Unit 6 is 8–13% of the exam — small, but the externality graph is a perennial free-response favourite. The Review Hub · AP Microeconomics Unit 6
Diagnose the spillover, move the right curve, name the direction, and size the fix. If you can draw both externality graphs from memory with every curve labelled, this unit is essentially done.
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How to use the visual review

Spend 30 seconds per step before clicking next. Look at the diagram, then ask yourself: "Could I sketch this from memory and label every part?"

Use the dots below the diagram to jump straight to any step, or the arrow keys to move forward and back.

This is great for review the night before the exam — fast, visual, and covers every core diagram you need to remember from Unit 6.