Any features of the economy that result in prices failing to reflect marginal social valuations. In a competitive economy with no market failure, utility maximization and profit maximization ensure that for any pair of products the marginal rate of substitution (MRS) is equal for all consumers and is equated to the marginal rate of transformation (MRT), which is equal for all producers. The maximization process ensure that the MRS and the MRT for any pair of goods are equal to the ratio of prices for those goods. Hence, prices reflect social valuations and guide choices to ensure an efficient allocation. When distortions are present, this will not be the case. Distortions can be caused by externalities, taxes, or monopoly power. The theory of second-best attempts to tackle the problem of what to do when some distortions can be reduced but others cannot.