The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd


  • T. N. Srinivasan
Reference work entry


The voluminous literature on distortions, including a masterly survey by Jagdish Bhagwati (1971), contains no formal definition of the term distortion. The analysis often proceeds in terms of specific examples. Bhagwati analyses distortions in the context of foreign trade policies and the welfare of home consumers. He characterizes distortions as departures from the equality of the marginal rate of transformation of one commodity into some other through foreign trade (the so-called foreign rate of transformation) with transformation through domestic production (the domestic rate of transformation) and with the marginal rate of substitution in the consumption of the same pair of commodities by each consumer. Also, the failure to achieve aggregate production efficiency, in the sense of not producing on the boundary of the set of production possibilities given available resources and technology, is deemed a distortion.

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© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • T. N. Srinivasan
    • 1
  1. 1.