Answer to Question #147510 in Microeconomics for Rishika

Question

The competition commission of india had imposed a penalty of more than Rs 60 billion on cement firms in 2012.
Justify the same based on following point
a) how do you think the cartel would affect the price & quantity? Can prices diverge significantly from marginal cost in cement industry, and why?
b) How do you think the cartel formation helps producers?
c) how do you think the cartel impacts the consumers?
d) how does the cartel affect overall welfare of the society and why?

Answer 1

a) Due to the imposition of penalties, there will be high cartel prices and a consequent loss in consumer welfare. Generally, a higher penalty regime will result in a higher cartel price/overcharge. Because of this then prices will diverge significantly from marginal cost in the cement industry.

b)Producers are helped, since the cartels can fix prices for members so as to avoid competition on price and also they may restrict output.

c) Cartels impact consumers negatively because there existence results in higher prices and restricted supply.

d) Cartels reduce welfare of society due to misallocation of resources.