Market distortion
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Market Distortion
An economic scenario that occurs when there is an intervention in a given market by a governing body. The intervention may take the form of price ceilings, price floors or tax subsidies. Market distortions create market failures, which is not an economically ideal situation.
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There is a tradeoff that regulators must make when deciding to intervene in any given marketplace. Although the intervention will create market failures, it is also intended to enhance a society's welfare.
For example, many governments subsidize farming activities, which makes farming economically feasible for many farmers. The subsidies paid to farmers create artificially high supply levels, which will eventually lead to price declines if the goods are not subsequently purchased by the government or sold to another nation. Although this type of intervention is not economically efficient, it does help ensure that a nation will have enough food to eat.
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Market distortion
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This article does not cite any references or sources. Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed. (November 2008) |
In neoclassical economics, a market distortion is any event in which a market reaches a market clearing price for an item that is substantially different from the price that a market would achieve while operating under conditions of perfect competition and state enforcement of legal contracts and the ownership of private property.
In this context, "perfect competition" means:
- all participants have complete information,
- there are no entry or exit barriers to the market,
- there are no transaction costs or subsidies affecting the market,
- all firms have constant returns to scale, and
- all market participants are independent rational actors.
Many different kinds of events, actions, policies, or beliefs can bring about a market distortion. For example:
- any policy or action that restricts information critical to the market,
- monopoly, oligopoly, or monopsony powers of market participants,
- criminal coercion or subversion of legal contracts,
- illiquidity of the market (lack of buyers, sellers, product, or money),
- collusion among market participants,
- mass non-rational behavior by market participants,
- price supports or subsidies,
- failure of government to provide a stable currency,
- failure of government to enforce the Rule of Law,
- failure of government to protect property rights,
- failure of government to regulate non-competitive market behavior,
- stifling or corrupt government regulation.
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