Economics Monopolistic Competition Questions
There are several causes of market failure in monopolistic competition:
1. Product differentiation: In monopolistic competition, firms differentiate their products to create a unique selling proposition. However, this differentiation can lead to market failure as it reduces consumer choice and can result in higher prices.
2. Lack of perfect information: Consumers may not have complete information about the various products available in the market. This can lead to market failure as consumers may make suboptimal choices due to incomplete knowledge.
3. Barriers to entry: Monopolistic competition can result in market failure if there are significant barriers to entry for new firms. This can limit competition and allow existing firms to maintain higher prices and lower quality products.
4. Externalities: Monopolistic competition can lead to market failure if there are external costs or benefits associated with the production or consumption of goods. These externalities are not accounted for in the market price, leading to an inefficient allocation of resources.
5. Imperfect competition: Monopolistic competition is characterized by imperfect competition, where firms have some degree of market power. This can result in market failure as firms may engage in anti-competitive behavior, such as collusion or predatory pricing, which can harm consumers and reduce overall welfare.
Overall, market failure in monopolistic competition arises due to the presence of imperfect competition, product differentiation, lack of perfect information, barriers to entry, and externalities.