Govt Intervention Definitions

Question 1

Consequences of Price Ceilings: Black/Parallel Markets

Answer 1

When there are people who are willing and able to pay higher prices than the legally set maximum price.

Question 2

Carbon Tax

Answer 2

Tax on output carbon emitted from burning fossil fuels

Question 3

Collective self-governance

Answer 3

Participation of industries in the measures planned and taken to resolve environmental issues

Question 4

Common Pool Resource

Answer 4

Rivalrous, Non Excludable

Leads to Tragedy of the Commons: overconsumption + depletion

Question 5

Allocative Efficiency (Socially Optimum)

Answer 5

Producing the optimal combination of goods from a society’s point of view

Achieved when the economy is allocating resources so that no one can be better off

Question 6

Consumer Surplus

Answer 6

The difference between the price that consumers pay and the price that they are willing to pay.

Question 7

Social/Community Surplus

Answer 7

The sum of the consumer surplus and producer surplus.

The total benefit gained by society when the market is at equilibrium.

Question 8

Producer Surplus

Answer 8

The difference between the price producers are willing and able to sell it and the price earned from selling the good at the market price.

Question 9

Deadweight/Welfare Loss

Answer 9

The loss of community surplus that is the result of government intervention or market failure.

Question 10

Tradable Permits

Answer 10

Imposition of a limit on the total amount of carbon dioxide that producers can release into the atmosphere.

Permits to release carbon dioxide are distributed to producers, and these permits can be bought and sold in the market.

Question 11

Excise Taxes

Answer 11

Taxes that aim to discourage the consumption of particular (demerit) goods

Question 12

Externalities

Answer 12

When the production or consumption of a good or service has an effect on a third party.

Question 13

Free Rider Problem

Answer 13

When a non-excludable good will not be produced by the free market because no one is willing to pay for it, when they think someone else will pay for it.

Question 14

Indirect Taxes

Answer 14

Charges levied on the consumption of goods

They raise production costs for firms, which are passed on to consumers through an increase in price.

Question 15

Marginal social benefit

Answer 15

The extra benefit / utility to society of consuming one more unit of output, including both the private benefit and the external benefits.

Question 16

Marginal social cost

Answer 16

The extra cost to society of producing one more unit of output, including both the private cost and the external costs.

Question 17

Minimum Price Controls

Answer 17

Minimum prices set by the government that are set above the equilibrium price.

Question 18

Maximum Price Controls

Answer 18

Maximum prices set by the government that are set below the equilibrium price.

Question 19

Pigouvian Tax

Answer 19

Indirect taxes used to reduce the problems of negative externalities

Question 20

Subsidy

Answer 20

An amount of money granted by the government to a firm or industry; it reduces the firm’s costs of production, increasing the supply of the good or service.

Usually a per-unit payment by the government to firms in order to lower production costs and increase production.

Question 21

Corruption

Answer 21

Corruption creates a misallocation of resources. Corruption interferes with market forces, and allocates resources unfairly.