Question

How can oligopoly cause market failure​

Answer 1

Answer: See explanation

Explanation:

Oligopoly is a market structure whereby there are few firms that dominate the market. These firms are typically interdependent regarding their output and pricing as they possess some market power.

On the other hand, market failure is when there's an inefficient distribution of the goods and services that are in the market. Some of the causes for market failure include:

• Exernalities

• Underprovision of merit goods.

• Abuse of market power

• Lack of public goods

• Overprovision of demerit goods.

Oligopoly can cause market failure due to the instability, and inefficiency in the market. There's a barrier to entry and the prices offered are typically above cost. The output and price offered by the firms are quite different from what the society wants and there's also misinformation from misleading advertisement which could lead to consumers purchasing products which aren't really needed. These creates market failure.