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 an externality.b.a market failure caused by market power.c.a market failure caused by equality.d.There is no market failure in this case.

Answer 1

Option (b) is correct.

Step-by-step explanation:

This is a case of monopoly market condition where there is a single firm operating the whole market. The price of the products is set by the single firm and the buyers in this market are price taker. The monopolist can earn normal profit, losses and abnormal profit in the short run and can earn normal profit and abnormal profit in the long run.

In our case, the price of diamonds is high because there is only single firm in the whole market and there is no other competitors in the market. That's why they are charging the higher prices.