Market power is considered to be a market failure because firms with market power:

Question

Quizplus · Accepted Answer

Firms with market power can restrict output and raise prices above the competitive market equilibrium. This results in producing less output than is socially optimal, leading to a deadweight loss. This is considered a market failure because society is not getting the full benefits that could have been obtained if the market was perfectly competitive. Option A is not correct because firms with market power still respond to consumer demand, but they have some control over it. Option B is incorrect because firms with market power can ignore external costs, but this is not necessarily a characteristic of firms with market power. Option D is also incorrect because firms with market power tend to charge a higher price than is socially optimal.

Market Power Is Considered to Be a Market Failure Because