Explain Why Member Firms of a Cartel Like OPEC Have

question 67

Essay

Explain why member firms of a cartel like OPEC have incentives to agree to a low cartel production level and then produce more than its quota.

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Definitions:

Price Ceiling

A legal maximum price that can be charged for a good or service, intended to protect consumers from high prices.

Subsidy

Financial assistance granted by a government or public body to support businesses, reduce the prices of goods and services, or encourage particular economic activities.

Profit

The financial gain achieved when the revenue from business activities exceeds the expenses, costs, and taxes involved in sustaining the activity.

Rent-seeking Behavior

Actions by individuals or firms to increase their own wealth without creating new wealth or value, often through manipulating the social or political environment.