A decrease in supply and demand and the buying and selling would eventually make the distortion. Market distortion in economics and finance is something occurs when an outside intervention by the governing body. The intervention may take the form of price ceilings, price floors, or tax subsidies. The excess in decline going to result in market distortion. The decrease in total surplus that results from a market distortion such as a tax is called a reaction which we didn’t think of earlier. Let’s discuss it further.
Market distortion is an irregularity that happens when some interference in the ongoing activities of the business occurs. The governing body and the upper board cause most intervention in the market. Due to this, the decline happens in the surplus in the market.
So what differs price distortion from market distortion. Price distortion happens, when the quoted or assigned prices will fluctuate from a certain level in the market. As a result, the risk factor is very critical and important here as the trading of the participants involved would collapse.
Does total decrease happen in the surplus from a market distortion?
Yes for sure, the total decrease will likely happen in the surplus from a market distortion. The decrease in total surplus that results from a market distortion such as a tax is called a deadweight loss. The surplus would happen since there would be a major excess of supply but the demand for the good would be lesser. This irregularity will cause a huge impact on buying and selling of stock shares and trading will surely be affected.
Decrease happen in Surplus
The decrease in total surplus that results from a market distortion such as a tax is called a Deadweight Loss and with that decrease, the surplus would decline by a huge margin.
Deadweight loss is when third-party intervention happens. The absence of free-market equilibrium and the third-party intervention in the form of binding price ceilings, price floors or a minimum wage by the government. This gives the induction of artificial and transparent shortage by the big players of the market. The imposition of a tax or subsidy leads to a deviation from the free market equilibrium creating deadweight loss which represents the reduction in total surplus or efficiency.
This turns the system into a maze or a loophole. The government intervention through the third-party affects the supply chain and the fluctuation in what are customers paying and what actually the cost. Also the difference in consumer paying capability and producers generating capabilities change during this hazardous situation.