DEFINITION of '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.
BREAKING DOWN 'Market Distortion'
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.