What does the term 'wedge' in microeconomics commonly refer to?

In microeconomics, the term 'wedge' commonly refers to the difference between the price consumers pay and the price producers receive. This concept is important in understanding various market dynamics, particularly how government interventions such as taxes and subsidies can create discrepancies in market prices.

When a tax is imposed on a good, for instance, it often leads to a situation where consumers pay a higher price while producers receive a lower price. The 'wedge' represents this gap created by the tax, affecting the overall market equilibrium. It highlights the inefficiency that can arise in markets due to these price discrepancies, leading to altered supply and demand conditions.

Understanding this concept is crucial for analyzing the impact of taxes and other government policies on consumer behavior and producer incentives, thus influencing overall market efficiency and welfare.