Because the program runs with root privileges, the call to system() also executes with root privileges. If a user specifies a standard filename, the call works as expected. However, if an attacker passes a string of the form ";rm -rf /", then the call to system() fails to execute cat due to a lack of arguments and then plows on to recursively delete the contents of the root partition.
Note that if argv[1] is a very long argument, then this issue might also be subject to a buffer overflow (CWE-120).
This example is a web application that intends to perform a DNS lookup of a user-supplied domain name. It is subject to the first variant of OS command injection.
(bad code)