Government Intervention in Markets

Vocabulary

adverse selection

when a market is inefficient because of one party lacking complete information

club good

a good that is excludable but not rivalrous

common good

a good that is rivalrous but not excludable

deadweight loss

loss to the economy due to either oversupply or undersupply, caused by resources being used inefficiently

excise tax

tax levied on the quantity of a specific good purchased, such as alcohol, gasoline, and cigarettes

excludable

characteristic of a good that someone who has not paid for can be prevented from consuming

externality

a consequence of an economic activity on a third party that is not directly involved in the action or decision; either a cost or a benefit

free market

a market in which prices are determined solely through the interaction of supply and demand for goods and services

government intervention

government involvement that impacts the free market system

imperfect information

a lack of complete knowledge by one or both parties about factors that would affect decision making

market failure

a situation in which equilibrium levels produced by the free market are inefficient

moral hazard

a situation in which an entity takes on a risk because they are protected against that risk

negative externality

a side effect of an economic activity that produces additional costs to society

positive externality

an additional benefit produced by an economic activity that accrues to people not directly involved in the economic activity

price ceiling

the maximum price, below the equilibrium price, that a seller can charge for a good or service, which causes a shortage of the good. Price ceilings placed above equilibrium are not effective.

price control

a minimum or maximum price set such that it cannot adjust to equilibrium levels (the intersection of the supply and demand curves)

price floor

the minimum price, higher than the equilibrium price, that a seller can legally charge for a good or service, which causes a surplus of the good. Price floors placed below equilibrium are not effective.

private good

a good or service bought for consumption

public good

product or service that is equally available to all citizens, regardless of their ability to pay

rivalrous

characteristic of a good that can only be consumed by one person at a time

subsidy

monetary support for an industry that keeps the prices of goods and services low

tax

a compulsory contribution required by the government and levied on income, profits, and some goods and services