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Explain How Collusion Makes Firms Better Off

question 127

Essay

Explain how collusion makes firms better off.Given the incentives to collude, briefly explain why every industry does not become a cartel.


Definitions:

Deadweight Losses

Losses in total surplus that occur when a market is not in competitive equilibrium, often due to taxes or subsidies.

Economic Efficiency

A situation where all resources are allocated in a way that maximizes the total benefit to society or minimizes waste.

External Cost

A cost that a transaction or activity imposes on a party who is not involved in the transaction, often not reflected in market prices.

Negative Externality

A cost that affects a party who did not choose to incur that cost, often associated with environmental, health, and safety concerns of public and private actions.

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