Multiple Choice
Which of the following best explains how the one-child policy in China led to large numbers of undocumented children?
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7. Externalities
Externalities: Social Benefits and Social Costs
Multiple Choice
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.
Verified step by step guidance1
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.
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.
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.
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.
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.
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