Question

1. Explain the economic theory behind deterrence and collusion. a. What is the argument for charging firms damages for participating in a cartel? b. What is the motivation behind trebling payoffs? c. What should be included in the set of damages from a cartel? What are the costs of a cartel to the economy?

Answer 1

1. Economic theory behind deterrence and pollution is the theory of oligopolistic cartel. According to this theory, firms, instead of participating in competition ,conspire with each other to gain profit.

a. The argument is that Cartels wears away the role of open and competitive markets as a important response to a socially inter related problem in a way that leads to harmful economic outcomes. Also, it takes away the right of customers in one way to pay and chose from variety and according to their choices.

C. Generally, people do not have complete information while making decisions and therefore have to make inferences about what they observe. Unlike laboratory experiment where people actually have the complete information.

D. The overcharge to the customers

- lack of demand.

- lack of economic growth.