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Market power is considered a market failure
Market power is considered a market failure.
a. Explain why this is a market failure.
b. Explain the problems associated with this market failure.
Expert Solution
a. Market power refers to the dominant power of a firm in the market due to which it may supply products and services according to his own interest or set the price of the products and services in the market. It is the form of market failure as a supplier do not charge equilibrium level of price level due to which there will be fluctuations in the consumer as well as producer surplus hat further lead to inefficient allocation of resources in the economy.
b. Various problems arises by market failure such that:
- It may lead to making a monopoly in the market.
- With the market, power producer can supply lesser products and services due to which demand exceeds supply in the market.
- High price charges by the firm may discourage potential buyers from buying such products and services due to which consumer surplus decreases in the economy.
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