Firms Faced with Prisoners' Dilemma Can Always Make More Profits

question 256

Essay

Firms faced with prisoners' dilemma can always make more profits by engaging in opportunistic behavior. Why is this type of behavior NOT commonly found even in oligopolistic markets?

---

Definitions:

Private Sector

The part of the economy that is run by individuals and companies for profit and is not state controlled.

Transaction Costs

Transaction costs are the expenses incurred in buying or selling goods or services, which can include search and information costs, bargaining costs, and enforcement costs.

Optimal Pigouvian Tax

A tax designed to correct the inefficiencies in a market that experiences externalities, set at a level that equates the marginal social cost of the externality with the marginal social benefit.

Socially Optimal

Pertains to a condition where resources are allocated in the most efficient manner from the perspective of society as a whole.