Question

The price of diamonds is high, in part because the majority of the world’s diamonds are controlled by a single firm. This is an example of a. a market failure caused by equality. b. a market failure caused by an externality. c. a market failure caused by market power. d. There is no market failure in this case.

Answer 1

C.

Step-by-step explanation:

If a market system is not competitive, control over prices leads to market power. Market power refers to the ability by one buyer or seller to control market price.

It causes markets to be inefficient, and thus fail. For example, monopoly prices are higher than competitive prices, and thus negatively affects consumers.

The monopolist gains but by less than what consumers lose. Therefore monopoly reduces total surplus.

If a single firm controlled the supply of something, it is consider a monopoly.