Why Government Intervenes
Taxes to Correct Negative Externalities
Subsidies to Correct Positive Externalities
Regulation of Natural Monopolies
Unregulated Monopoly $MR = MC$ → low Q, high P, DWL
Socially Optimal Pricing ($P = MC$) Allocatively efficient but firm earns a **loss** (P < ATC) → requires government subsidy
Fair-Return Pricing ($P = ATC$) Firm earns **zero economic profit** → no subsidy needed, but some DWL remains ($P > MC$)
Natural monopoly: P=ATC earns zero profit; P=MC is efficient but firm loses money
Antitrust Policy
Tradable Pollution Permits (Cap and Trade)
Government Provision of Public Goods
Price Controls (Review)
Unintended Consequences
AP Exam Tips
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Common Mistakes
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