Market Distortion

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Certificate Of Need

    An endorsement required by numerous states before the construction ...
  2. Subsidy

    A benefit given by the government to groups or individuals usually ...
  3. Market Disruption

    A situation where markets cease to function in a regular manner, ...
  4. Market Failure

    An economic term that encompasses a situation where, in any given ...
  5. Economy

    The large set of inter-related economic production and consumption ...
  6. Transfer Payment

    1. In the United States, a payment made to individuals by the ...
Related Articles
  1. Economics

    The Federal Reserve

    Few organizations can move the market like the Federal Reserve. As an investor, it's important to understand exactly what the Fed does and how it influences the economy.
  2. Economics

    Understanding Supply-Side Economics

    Does the amount of goods and services produced set the pace for economic growth? Here are the arguments.
  3. Options & Futures

    Explaining The World Through Macroeconomic Analysis

    From unemployment and inflation to government policy, learn what macroeconomics measures and how it affects everyone.
  4. Investing

    What are the economic implications of government subsidies on fuel costs?

    In order to make the price of oil more affordable to its citizens, governments sometimes provide subsidies, which can allow the price of oil to remain fixed below free floating market rates. ...
  5. Retirement

    Economic Indicators To Know

    The economy has a large impact on the market. Learn how to interpret the most important reports.
  6. Economics

    What is a roll-up merger and why does it occur?

    Find out what a roll-up merger is and how it is executed. See why roll-ups might bring added efficiency and competition into a fragmented market.
  7. Economics

    What are the differences between internal and external economies of scale?

    Take a deeper look at the differences between internal and external economies of scale, and learn why internal economies offer more competitive advantage.
  8. Economics

    How does marginal cost of production relate to economies of scale?

    See how marginal cost of production relates to economies of scale, and why every company should be concerned with reducing its marginal costs.
  9. Professionals

    How do companies measure labor supply in human resources planning?

    Find out how and why a company's human resources department would measure labor supply, and what policies would address a shortage or surplus.
  10. Economics

    What is a diseconomy of scale and how does this occur?

    Take a deeper look into diseconomies of scale, the economic phenomenon that can make companies less efficient as they become too large.

You May Also Like

Hot Definitions
  1. Command Economy

    A system where the government, rather than the free market, determines what goods should be produced, how much should be ...
  2. Prospectus

    A formal legal document, which is required by and filed with the Securities and Exchange Commission, that provides details ...
  3. Treasury Bond - T-Bond

    A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest ...
  4. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  5. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  6. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
Trading Center