Final answer:
In a competitive market, firms earn zero economic profits, but firms in a successful cartel can earn positive economic profits by acting like a monopoly to raise prices and limit output. The long-run effect of competition is to eliminate profits as prices fall to the level of average costs.
Step-by-step explanation:
In a competitive market, each firm earns zero economic profits, whereas firms in a successful cartel will earn positive economic profits.
The competition in markets tends to erode the profits of firms due to entry of new firms, driving prices down to the level of average cost. When a market has fierce competition and firms are unable to differentiate significantly, they will eventually earn zero economic profits in the long run. On the other hand, a successfully formed cartel will act collectively like a monopoly, reducing output to increase prices and, thus, securing positive economic profits for themselves, assuming they can overcome the incentive to cheat and can prevent entry of new competition.
Cartels can charge higher prices and control the quantity supplied to maintain their profit levels. However, if the cartel were to break up, firms would revert to competitive behaviors, leading to lower prices, higher output, and zero economic profits collectively in the long run.