Explain why Market Power may cause market outcomes to be inefficient

Market power exists when there is a lack of competition in the market. These are typical in the case of a monopoly (one seller) and an oligopoly (a few sellers). In perfect competition, there are a low of buyers and sellers competing against each other. When this occurs, the market is guided to equilibrium. When a firm has market power, on the other hand, the firm has the ability to set the price and output level at a profit-maximizing point. This point is typically at a higher price and lower output level relative to perfectly-competitive markets. When this occurs, the level of output is below the efficient level of output and total surplus is not maximized. Therefore, market power often leads to less total surplus than could be achieve with more competition, resulting in society being worse off.