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What is a market distortion?

Market distortion

A market distortion refers to an event in which a governing body intervenes in a market. Generally, it sees the market clearing price for an item significantly differing from the price that a market would achieve while operating under conditions of perfect competition.

Where have you heard about market distortions?

An example of market distortion is a government subsidising farming activities. By paying farmers subsidies, a farmer's job becomes economically feasible and they're able to create artificially high supply levels, which in turn helps to ensure the nation can afford to eat/drink.

What you need to know about market distortions.

Market distortions may not always be economically efficient, but they generally intend to enhance a society's welfare. As represented in the example above, markets can become distorted when a single business holds a monopoly and a lack of competition typically leads to higher prices - and in some cases, this requires the government to intervene. When open and free competition is prevented, it causes problems for both consumers and private sector businesses following standard procurement procedures. Other forms market distortions can take is price floors and price ceilings.

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