Cartels are difficult to operate for which of the following reasons?

• A. Individual firms have an incentive to cheat to increase their own profits.
• B. Cartels can easily monitor and enforce all agreements among members.
• C. Cartels face no legal restrictions in most countries.
• D. Cartels always have government support.

Answer: (A)

Verified step by step guidance

1. Understand the concept of a cartel: A cartel is a group of independent firms that agree to coordinate their production and pricing decisions to maximize joint profits, often by restricting output to raise prices.
2. Recognize the incentive problem within cartels: Each individual firm in a cartel has an incentive to cheat by secretly increasing its output to gain a larger share of the market and increase its own profits, even though this behavior harms the cartel's overall agreement.
3. Analyze the difficulty of monitoring and enforcement: Cartels often struggle to monitor whether members are adhering to the agreed production limits, making enforcement of the agreement challenging.
4. Consider legal and regulatory environments: Many countries have laws that prohibit or restrict cartels because they reduce competition and harm consumers, adding legal risks to cartel operations.
5. Summarize why cartels are difficult to operate: The main reason is the incentive for individual firms to cheat to increase their own profits, combined with challenges in monitoring, enforcement, and legal restrictions.