Market Failure and the Role of Government — AP Microeconomics
1. Unit at a Glance
This unit follows a clear arc: we start with the core definition of market failure, when the unregulated market does not maximize total social surplus. We first examine the most common sources of failure: externalities (spillover costs and benefits) and public goods, then move to government policy to address market power, before exploring how goods are classified by their characteristics. We end the unit with an analysis of economic inequality and the role of the modern welfare state.
A major focus of this unit is evaluating when government intervention is justified, and when it can lead to its own inefficiencies (called government failure). You will practice graphical analysis of externalities and market failure, a skill that regularly appears on AP Microeconomics free response questions.
Common Pitfalls
Why: This leads to incorrect calculation of the socially efficient quantity and wrong placement of deadweight loss on graphs.
Why: Government interventions can lead to government failure from unintended consequences or inefficient implementation.
Why: Misclassification leads to incorrect conclusions about why goods are over or underprovided by the market.