What is Market Distortion?

A market distortion occurs as a result of a government's involvement in a market through monetary or fiscal policies.

How Does Market Distortion Work?

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 Does Market Distortion Matter?

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.

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Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

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