Contracts Cannot Solve the Inefficiency That Arises from Externalities

question 48

True/False

Contracts cannot solve the inefficiency that arises from externalities.

Recognize the importance of game theory in explaining behavior in oligopolies and the interdependence of firms.

Understand the concept and examples of tacit and overt collusion in regulating competition among firms.

Identify conditions under which tacit collusion is difficult to achieve or maintain in markets.

Recognize the role of international cartels, particularly OPEC, in affecting global markets.

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Definitions:

Capacity

The maximum level of output that a company can sustain to produce in a given period under normal circumstances.

Sunk Costs

Sunk costs are past expenses that have already been incurred and cannot be recovered, and thus should not affect future business decisions.

Opportunity Costs

The loss of potential gain from other alternatives when one alternative is chosen.

Cost Accounting System

A framework used to record, analyze, and allocate costs associated with a company's operations and production processes.