What it is:
A market distortion occurs as a result of a government's involvement in a market through monetary or fiscal policies.
How it works (Example):
Governments frequently intervene in a country's economy and implement policy measures. These measures result in market distortions characterized by inefficiency that can ultimately lead to market failures. Examples of policy measures that create market distortions include taxation, minimum wage legislation, government subsidies and any regulation that places an upper or lower price limit on specific products and services.
Why it Matters:
Market distortions are a byproduct of government policies that aim to protect and raise the general well-being of all market participants. For this reason, analysts and lawmakers seeks a balance between the general well-being of all market participants and market efficiency in the formulation of economic policy.