For which of the following markets would there be a greater increase in total welfare if...

For which of the following markets would there be a greater increase in total welfare if government were able to intervene and regulate prices: OPEC or the music industry?

Explain your answer.

The music industry because it is a colluding oligopoly and is more inefficient.

OPEC because it is a colluding oligopoly and is more efficient.

The music industry because it is not a colluding oligopoly and is more inefficient.

OPEC because it is a colluding oligopoly and is more inefficient.

Expert Solution

The correct answer is: (D) OPEC because it is a colluding oligopoly and is more inefficient.

An oligopoly is a market form wherein a market or industry is dominated by a small group of large sellers. Firms in an oligopoly may collude to set a price or output level for a market in order to maximize industry profits. At an extreme, the colluding firms can act as a monopoly. Oligpolists charge a price higher than perfect competition but produce a lower output- result in inefficiencies.

The Organization of Petroleum Exporting Countries (OPEC) is an example of an oligopoly colluding overtly to fix the price of a barrel of oil - currently there are 12 members and according to OPEC they control 81% of crude oil reserves.

Total welfare would increase if the government were able to intervene and regulate prices in OPEC because it is a colluding oligopoly and is more inefficient. Music industry is not a colluding oligopoly and thus is less inefficient.

Rahul Sunny answered 2 years ago

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