How does the short circuit form? What is its effect?

Hint: A short circuit is the name given to the phenomena when the positive end and the negative end of a live wire carrying current (high voltage) meet to produce sparks (electrical/fire) or events of breakdown of air which even causes fire sometimes.

Complete answer:
If we make an a.c. circuit, if we take two ends of it and join those two ends suddenly, we find sparks coming out. The sparks are nothing but the air molecules getting excited by experiencing the electric field produced by the wire which gives away free electrons i.e., the air molecules get ionized. Since air is a dielectric material, it does not conduct electricity, in high electric fields, it breaks down and as the electrons separate out recombines, we observe the phenomenon of short circuit.
In electronics, the term short circuit is often used to denote a connection made between two points with some potential difference. Suppose if a circuit element is present and in the circuit, we give an extra connection going over that element, which gives an easy path for the current, we say that circuit has been shorted.

Note:
When a potential difference exists at two plates separated by some distance, the electric field across it increases with the decreasing distance. We only observe the sparks when the opposite polarity wire comes very close. As they are very close, the electric field is very high in that region. The strength of the electric field is the sole player in determining whether the air molecules will suffer breakdown or not.