When a firm has market power, this can lead to market failure as a result of underproduction.
Having market power means that:
- A firm no longer has to compete with other firms for dominance
- A firm will produce less goods because they are not competing with anyone
- A firm will charge a higher price
When a firm begins to underproduce because they are not as efficient, this is usually because they are not in competition to be better. This reduces the welfare of the people because less goods are available to them.
In conclusion, underproduction occurs when there is market power.
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