Definition
- Distortion of price signals
- A distortion of price signals is when a tax, subsidy or price rule changes prices so that they no longer reflect true costs and benefits.
Example
Can you think of an example of distortion of price signals?
A subsidy for producing a good that causes high levels of pollution keeps its price low, so buyers and firms are told to make and use more of it than society should.
Test yourself
Can you name the four types of government failure the specifications list, and a fifth this page adds?