Distortions (economics)

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Distortions in economics refers to conditions that in theory create economic inefficiency (a systematic loss of economic welfare). Examples include rent seeking and conditions that result in a deviation of the marginal rate of substitution in consumption and the marginal rate of transformation in production between goods. commonly measured by the demand price and marginal cost. Such a deviation may result from unregulated monopoly, tariffs, import quotas, uncorrected externalities, or different tax rates on goods. Each of each these may lead to a net loss in consumer surplus (Srinivasan, 1987; Slemrod, 1990). By contrast, in the idealized conditions of perfect competition, there are no such distortions at market equilibrium of supply and demand.

[edit] See also

• Excess burden of taxation
• Inflation#Effects of inflation
• Government failure
• Lump-sum tax
• Market failure
• Optimal tax

[edit] References

• Alan Deardorff. "Distortion," Deardorff's Glossary of International Economics - D -.
• T. N. Srinivasan (1987). "Distortions," The New Palgrave: A Dictionary of Economics, v. 1, pp. 865-67.
• Joel Slemrod (1990). "Optimal Taxation and Optimal Tax Systems," Journal of Economic Perspectives, 4(1), pp. 157-178.