Question

1. Private colleges of the same caliber generally charge roughly the same tuition. Would you characterize these colleges as a cartel type of oligopoly?
2. Suppose an air-quality law is passed that requires 3.75 percent of all the cars sold to emit zero pollution.
   • What would be the likely impact of this law?
   • Can you think of any way in which this law might actually increase pollution rather than decrease it?
   • How might an economist suggest modifying this law to better achieve economic efficiency?

Answer 1

Private colleges offering same caliber, means there is a uniformity of the educational products and other related services. It makes the market to be similar to perfect competition ( but not perfect competition as there will be some point of differentiation). So, it will not be a cartel. It is also due to the reason that cartel causes participating entities to reduce the supply of products such as number of seats in this case. But, this tendency is not observed. Besides, reduction in fee by one college is not essentially followed by  other colleges. So, it is not a cartel formation.

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Likely impact will be negative supply shock and the supply of cars will decrease as firms have to produce some of their cars with superior clean and green technology. Hence, the supply curve will shift to the left and price of cars increases at the new equilibrium and output of cars will decrease at the new equilibrium.

When firms use superior technology to produce cars with zero pollution that it increases the cost to the part of the firms. To compensate it, firms use cheaper technology and poor emission standards in other cars that produce more pollution than they were producing in the past. So, the net result is higher pollution in the environment. It is the way that can cause increase in pollution level when firms try to offset the increased cost.

The superior economic efficiency can be achieved by setting the standard of maximum emission level by each car produced by the firms. It means that there is no pervasive incentives in terms of increasing emission of some cars by using cheaper technologies. Since the law requires standard emission level, then firms will be forced to produce cars using better and clean-green technologies. It will achieve socially optimal equilibrium in the market and superior economic efficiency.