Cartels are difficult to maintain because:

• A. cartels face no competition from outside firms
• B. cartels always operate legally in all countries
• C. individual members have an incentive to cheat and increase their own output
• D. cartels guarantee stable prices for all members

Answer: (C)

Verified step by step guidance

1. Understand the concept of a cartel: a group of firms that agree to coordinate their production and pricing to maximize joint profits, often by restricting output to raise prices.
2. Recognize that cartels face an internal incentive problem because each member benefits individually by producing more than the agreed quota to increase their own profit, even though this harms the cartel's collective outcome.
3. Note that this incentive to cheat leads to instability in the cartel agreement, as members secretly increase output, causing prices to fall and reducing overall cartel profits.
4. Acknowledge that cartels do not face competition from outside firms by definition, but their main challenge is maintaining cooperation among members due to these cheating incentives.
5. Conclude that the difficulty in maintaining cartels arises primarily because individual members have an incentive to cheat and increase their own output, undermining the cartel's effectiveness.