In a competitive equilibrium, a proportional wage income tax discourages work.
[2] In perfect competition with no externalities, there is zero distortion at market equilibrium of supply and demand where price equals marginal cost for each firm and product.
Such a deviation may result from government regulation, monopoly tariffs and import quotas, which in theory may give rise to rent seeking.
Other sources of distortions are uncorrected externalities,[3] different tax rates on goods or income,[4] inflation,[5] and incomplete information.
In the context of markets, "perfect competition" means: Many different kinds of events, actions, policies, or beliefs can bring about a market distortion.