AP Microeconomics: Market Failure and Deadweight Loss


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PROFESSIONAL DEVELOPMENT
AP® Microeconomics
Market Failure and Deadweight Loss
CuRRICuLuM MODuLE

PROFESSIONAL DEVELOPMENT
AP® Microeconomics
Market Failure and Deadweight Loss
CURRICULUM MODULE
The College Board New York, NY

About the College Board
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Contents
Preface ................................................................................................................................... 1
Introduction ........................................................................................................................ 3 Connections to the AP® Microeconomics Curriculum .......................................... 4 Connections to the AP Microeconomics Exam....................................................... 4 Instructional Plan ....................................................................................................... 4 Assessments ................................................................................................................. 4 Prerequisite Knowledge ............................................................................................. 5 Instructional Time and Strategies ........................................................................... 5
Lesson 1: Market Structure and Deadweight Loss .............................................. 7 Essential Questions..................................................................................................... 7 Lesson Summary .......................................................................................................... 7 Activity 1: Perfect Competition and Market Efficiency....................................... 9 Activity 2: Monopoly and Market Failure.............................................................. 14 Activity 3: Monopoly and Public Policy Group Activity .....................................18
Lesson 2: Externalities and Public Goods: Market Failures and Deadweight Loss .................................................................... 21
Essential Questions...................................................................................................21 Lesson Summary .......................................................................................................21 Activity 1: Positive and Negative Externalities .................................................23 Activity 2: Public Goods ........................................................................................... 33
Summative Assessment................................................................................................42
Curriculum Module Summary .....................................................................................43 Learning Outcomes ................................................................................................... 43 Next Curricular Steps ................................................................................................ 43
Reference ............................................................................................................................ 43
Contributors ......................................................................................................................44

Preface
AP® curriculum modules are exemplary instructional units composed of one or more lessons, all of which are focused on a particular curricular topic; each lesson is composed of one or more instructional activities. Topics for curriculum modules are identified because they address one or both of the following needs:
• a weaker area of student performance as evidenced by AP Exam subscores • curricular topics that present specific instructional or learning challenges
The components in a curriculum module should embody and describe or illustrate the plan/teach/assess/reflect/adjust paradigm:
1. Plan the lesson based on educational standards or objectives and considering typical student misconceptions about the topic or deficits in prior knowledge.
2. Teach the lesson, which requires active teacher and student engagement in the instructional activities.
3. Assess the lesson, using a method of formative assessment. 4. Reflect on the effect of the lesson on the desired student knowledge, skills, or
abilities. 5. Adjust the lesson as necessary to better address the desired student
knowledge, skills, or abilities.
Curriculum modules will provide AP teachers with the following tools to effectively engage students in the selected topic:
• enrichment of content knowledge regarding the topic • pedagogical content knowledge that corresponds to the topic • identification of prerequisite knowledge or skills for the topic • explicit connections to AP learning objectives (found in the AP curriculum
framework or the course description) • cohesive example lessons, including instructional activities, student
worksheets or handouts, and/or formative assessments • guidance to address student misconceptions about the topic • examples of student work and reflections on their performance
The lessons in each module are intended to serve as instructional models, providing a framework that AP teachers can then apply to their own instructional planning.
— The College Board

Preface

1

Introduction
Mary Kohelis Brooke High School Wellsburg, W.Va.
A fundamental concept in microeconomics is the maximization of consumer and producer surplus through efficient free markets. The purpose of this AP curriculum module is to examine market failure and deadweight loss, key areas in which efficiency eludes the free market. Although students taking the AP Microeconomics Exam are expected to answer questions on these subjects, as described in the AP Economics: Microeconomics Macroeconomics Course Description, many students have trouble understanding the material. In his 2011 AP Microeconomics Exam Report, Chief Reader David Anderson listed 11 topics, on the operational and overseas exams, that proved challenging to students. The concepts of market failure and deadweight loss make up four of those topics.
Some of the course textbooks do not explain these subjects adequately. Therefore, students must depend on their teachers’ initiative and expertise in supplementing the textbook with appropriate resources. Although deadweight loss is a part of several economic models, teachers, as well as students, may not take into account the connections that exist. For example, deadweight loss that exists in firms with market power, in markets with positive and negative externalities, and with public goods all share one trait: a loss of efficiency. This curriculum module offers teachers a ready resource for the information and skills necessary in helping students understand market failure and deadweight loss.
The first lesson, “Market Structures and Deadweight Loss,” written by James Redelsheimer, begins with an explanation of efficiency in the perfectly competitive market and serves as the benchmark for the activities that follow, by showing the efficiency achieved in a perfectly competitive industry. The second half of Lesson 1 describes the monopoly model: it illustrates the market failure that exists when a monopoly charges a higher price and produces a lower quantity than the perfectly competitive industry.
Lesson 2, “Externalities and Public Goods,” by Pamela Schmitt, presents detailed descriptions and graphical analyses of two additional areas in which inefficiency exists in free markets. In the first activity, Schmitt distinguishes between marginal private benefits/costs and marginal social benefits/costs as they pertain to both positive and negative externalities. The second activity provides teachers with an instructional tool for explaining public goods and the deadweight loss that exists if only private markets are considered.
It is important to note that in both Lessons 1 and 2, the discussion focuses on the issues of market failure and deadweight loss with the polar extremes of market structures, those being perfect competition and pure monopoly. Although not a part of this curriculum module, the other market structures — monopolistic competition, oligopoly, and duopoly — also exhibit market failure and deadweight loss.
3

Introduction

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AP Microeconomics: Market Failure and Deadweight Loss