Market Failure

Situation where resources cannot be efficiently allocated due to the breakdown of the price mechanism caused by factors such as the establishment of monopolies or externalities.

In instances where there is a monopoly, the monopolist can determine the market price. The monopolist will manipulate the market price in order to increase profits. But such a price may not necessarily (and usually isn't) the market clearing price. This prevents mutually beneficial trades from occurring giving rise to inefficiency.

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