Answer to Question #212051 in Macroeconomics for Z MATHEBULA

Question

how can oligopoly cause market failure

Answer 1

Market failure refers to uneven distribution of goods and services in a market. There is no Pareto Efficiency.

In a free market, the prices of goods and services are determined by the forces of demand and supply. Any alteration in supply or demand leads to the a change in the other leading to equilibrium.

In the case of an Oligopoly, the firms are price makers.The firms produce commodities enough to help them maximize their profit margins. Consequently, their is no equilibrium. The firms make supernormal profits and also cause occurrence of dead weight in the market as shown below.

This results to market failure.