Distortion (economics): Difference between revisions
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A '''distortion''' is departure from the allocation of economic resources from the state in which each agent maximizes his/her own welfare.<ref>[[Alan Deardorff]]. "[http://www-personal.umich.edu/~alandear/glossary/d.html#distortion Distortion]", Deardorff's Glossary of International Economics.</ref> 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.<ref>Stephen D. Williamson (2010). "Sources of Social Inefficiencies," ''Macroeconomics'', 3rd Edition.</ref> |
A '''distortion''' is departure from the allocation of economic resources from the state in which each agent maximizes his/her own welfare.<ref>[[Alan Deardorff]]. "[http://www-personal.umich.edu/~alandear/glossary/d.html#distortion Distortion]", Deardorff's Glossary of International Economics.</ref> 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.<ref>Stephen D. Williamson (2010). "Sources of Social Inefficiencies," ''Macroeconomics'', 3rd Edition.</ref> |
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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 cost|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]] [[tariff]]s and [[import quota]]s, which in theory may give rise to [[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.]<br/> • Louis Kaplow (2008). "income taxation and optimal policies," ''The New Palgrave Dictionary of Economics'', 2nd Edition. [http://www.dictionaryofeconomics.com/article?id=pde2008_I000245 Abstract.]<br/> • 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> [[Inflation#Effects|inflation]],<ref>S. Rao Aiyagari, R. Anton Braun, [[Zvi Eckstein]] (1998). "Transaction Services, Inflation, and Welfare," ''Journal of Political Economy'', 106(6), pp. [http://www.econ.umn.edu/~eckstein/research/Aiya-Braun-Eckstein.pdf 1274-1301] (press '''+''').</ref> and [[incomplete information]]. Each of these may lead to a net loss in [[social surplus]].<ref>• [[T. N. Srinivasan]] (1987). "distortions," ''[[The New Palgrave: A Dictionary of Economics]]'', v. 1, pp. 865-67.<br/> • 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.</ref> |
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 cost|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]] [[tariff]]s and [[import quota]]s, which in theory may give rise to [[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.]<br/> • Louis Kaplow (2008). "income taxation and optimal policies," ''The New Palgrave Dictionary of Economics'', 2nd Edition. [http://www.dictionaryofeconomics.com/article?id=pde2008_I000245 Abstract.]<br/> • 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> [[Inflation#Effects|inflation]],<ref>S. Rao Aiyagari, R. Anton Braun, [[Zvi Eckstein]] (1998). "Transaction Services, Inflation, and Welfare," ''Journal of Political Economy'', 106(6), pp. [http://www.econ.umn.edu/~eckstein/research/Aiya-Braun-Eckstein.pdf 1274-1301] {{wayback|url=http://www.econ.umn.edu/~eckstein/research/Aiya-Braun-Eckstein.pdf |date=20050521012313 }} (press '''+''').</ref> and [[incomplete information]]. Each of these may lead to a net loss in [[social surplus]].<ref>• [[T. N. Srinivasan]] (1987). "distortions," ''[[The New Palgrave: A Dictionary of Economics]]'', v. 1, pp. 865-67.<br/> • 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.</ref> |
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==See also== |
==See also== |
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Revision as of 01:00, 14 December 2016
A distortion is departure from the allocation of economic resources from the state in which each agent maximizes his/her own welfare.[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]
See also
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Notes
- ^ Alan Deardorff. "Distortion", Deardorff's Glossary of International Economics.
- ^ Stephen D. Williamson (2010). "Sources of Social Inefficiencies," Macroeconomics, 3rd Edition.
- ^ 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.
• Louis Kaplow (2008). "income taxation and optimal policies," 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. - ^ S. Rao Aiyagari, R. Anton Braun, Zvi Eckstein (1998). "Transaction Services, Inflation, and Welfare," Journal of Political Economy, 106(6), pp. 1274-1301 Template:Wayback (press +).
- ^ • 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), p p. 157-178.
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