Distortion (economics)

A distortion is "any departure from the ideal of perfect competition that therefore interferes with economic agents maximizing social welfare when they maximize their own".[1] A proportional wage-income tax, for instance, is distortionary, whereas a lump-sum tax is not. In a competitive equilibrium, a proportional wage income tax discourages work.[2]

In perfect competition with no externalities, there is zero distortion at market equilibrium of supply and demand where price equals marginal cost for each firm and product. More generally, a measure of distortion is the deviation between the market price of a good and its marginal social cost, that is, the difference between the marginal rate of substitution in consumption and the marginal rate of transformation in production. Such a deviation may result from government regulation, monopoly tariffs and import quotas, which in theory may give rise to rent seeking. Other sources of distortions are uncorrected externalities,[3] different tax rates on goods or income,[4] inflation,[5] and incomplete information. Each of these may lead to a net loss in social surplus.[6]

This page was last edited on 14 May 2018, at 15:20 (UTC).
Reference: https://en.wikipedia.org/wiki/Economic_distortion under CC BY-SA license.

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