Final answer:
The primary objective of a cartel is joint profit maximization. Cartels aim to set prices and output like a monopolist to maximize collective profits. When cartels break down and firms compete, prices and collective profits decrease while output increases.
Step-by-step explanation:
The objective of a cartel is joint profit maximization. Cartels are formed when a group of firms, usually in an oligopolistic market, collude to set prices and output levels similar to a monopoly. By doing so, they aim to increase their collective profits at the expense of allocative and productive efficiency.
If the cartel breaks up, the firms will compete, leading to lower prices, increased output, and ultimately, reduced collective profits compared to the cartel situation. The equilibrium price under cutthroat competition will be lower, and the output will be higher, but the collective profits will be lower compared to the cartel arrangement.
In a perfectly competitive market, firms will produce up to the point where price equals marginal cost (P = MC), ensuring allocative efficiency. However, cartels, like monopolies, will set prices above marginal cost, leading to allocative inefficiency and higher profits for themselves at the expense of consumers.