Governments may create, rather than remove, market distortions
Sometimes government intervention makes resource allocation worse, not better. Instead of fixing a market problem, the policy introduces a new distortion of its own.
Real World
EU Common Agricultural Policy subsidies artificially inflated food production, creating vast butter and grain surpluses in the 1980s — the infamous 'butter mountains' — while distorting global prices and undercutting farmers in developing countries.
Exam Focus
Distinguish the original market failure from the new distortion the policy creates — examiners reward this two-stage analysis.
Price Elasticity of Demand
PED = % change in quantity demanded ÷ % change in price
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