Suppose an oil cartel has an agreement to restrict members' production in order to maintain a price of $30 per barrel. A single cartel member may want to cheat and exceed its quota so that it can:

Question

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By exceeding its quota and producing more oil, the cartel member can sell the additional barrels at the fixed price of $30 per barrel and earn a bigger profit. This is because the production cost of each additional barrel is likely to be lower than the fixed price, resulting in a profit margin for the cartel member. However, if every member cheats, the cartel’s agreement will be ineffective, and the price of oil will decrease.

Suppose an Oil Cartel Has an Agreement to Restrict Members