Distortion (economics): Difference between revisions
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A '''distortion''' (or '''market imperfection''') is a condition that creates [[economic inefficiency]], thus interfering with [[economic agent]]s maximizing "social welfare" when they maximize their own welfare.<ref>[[Alan Deardorff]]. "[http://www-personal.umich.edu/~alandear/glossary/d.html#distortion Distortion]", Deardorff's Glossary of International Economics.</ref> |
A '''distortion''' (or '''market imperfection''') is a condition that creates [[economic inefficiency]], thus interfering with [[economic agent]]s maximizing "social welfare" when they maximize their own welfare.<ref>[[Alan Deardorff]]. "[http://www-personal.umich.edu/~alandear/glossary/d.html#distortion Distortion]", Deardorff's Glossary of International Economics.</ref> |
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A condition used to measure distortion is the deviation between the market price of a good and its [[marginal 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 |
A condition used to measure distortion is the deviation between the market price of a good and its [[marginal 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 [[monopoly]], [[tariff]]s and [[import quota]]s, which in theory may give rise to a certain kind of behavior called [[rent seeking]]. Other sources of distortions are uncorrected [[externalities]],<ref>[[Agnar Sandmo]] (2008). "Pigouvian taxes." ''[[The New Palgrave Dictionary of Economics]]'', 2nd Edition. [http://www.dictionaryofeconomics.com/article?id=pde2008_P000351&q=distortions&topicid=&result_number=2 Abstract.]</ref> different tax rates on goods or income,<ref>Louis Kaplow (2008). ."optimal taxation," ''The New Palgrave Dictionary of Economics'', 2nd Edition. [http://www.dictionaryofeconomics.com/article?id=pde2008_O000034&q=distortion%20&topicid=&result_number=8 Abstract.]</ref><ref>Alan J. Auerbach (2008). "taxation of corporate profits," ''The New Palgrave Dictionary of Economics'', 2nd Edition. [http://www.dictionaryofeconomics.com/article?id=pde2008_T000023&q=Distortion%20&topicid=&result_number=2 Abstract.]</ref> and [[incomplete information]]. Each of these may lead to a net loss in [[consumer surplus]].<ref>[[T. N. Srinivasan]] (1987). "distortions," ''The New Palgrave: A Dictionary of Economics'', v. 1, pp. 865-67.</ref><ref>Joel Slemrod (1990). "Optimal Taxation and Optimal Tax Systems," ''Journal of Economic Perspectives'', 4(1), p[http://links.jstor.org/sici?sici=0895-3309%28199024%294%3A1%3C157%3AOTAOTS%3E2.0.CO%3B2-D&size=LARGE&origin=JSTOR-enlargePage p. 157]-178. |
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</ref> In the idealized conditions of [[perfect competition]], there is zero distortion at market equilibrium of [[supply and demand]]. |
</ref> In the idealized conditions of [[perfect competition]], there is zero distortion at market equilibrium of [[supply and demand]]. |
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Revision as of 00:08, 23 January 2009
A distortion (or market imperfection) is a condition that creates economic inefficiency, thus interfering with economic agents maximizing "social welfare" when they maximize their own welfare.[1]
A condition used to measure distortion is the deviation between the market price of a good and its marginal 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 monopoly, tariffs and import quotas, which in theory may give rise to a certain kind of behavior called rent seeking. Other sources of distortions are uncorrected externalities,[2] different tax rates on goods or income,[3][4] and incomplete information. Each of these may lead to a net loss in consumer surplus.[5][6] In the idealized conditions of perfect competition, there is zero distortion at market equilibrium of supply and demand.
See also
- Excess burden of taxation
- Imperfect competition
- Inflation#Effects of inflation
- Government failure
- Lump-sum tax
- Market failure
- Optimal tax
- Welfare economics
Notes
- ^ Alan Deardorff. "Distortion", Deardorff's Glossary of International Economics.
- ^ Agnar Sandmo (2008). "Pigouvian taxes." The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
- ^ Louis Kaplow (2008). ."optimal taxation," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
- ^ Alan J. Auerbach (2008). "taxation of corporate profits," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
- ^ 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.
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