Price distortions
Topic: Markets, Equilibrium and Government Intervention · NCERT: Class 9, Ch 9 "The Price Puzzle: What Drives the Market"
Meaning
Price distortions happen when prices are pushed away from the levels demand and supply would set. The usual causes are government price controls, taxes or subsidies. Prices act as signals that tell producers what to make and consumers what to buy, so wrong prices lead to misallocation of resources. For example, a price fixed below the market level causes shortages and weakens the incentive to produce.
Example
Suppose the government fixes wheat at ₹20/kg when the market price is ₹30/kg (Class 9). Farmers earn less per kg, so they grow less wheat or switch to other crops. Supply falls and shortages follow.
Don't confuse with
- Deadweight loss: this is the welfare cost of a distortion. It is the loss of consumer plus producer surplus from trades that no longer happen. The price distortion is the gap in prices. Deadweight loss is the harm that gap causes.