Question

19. What tendency within capitalism is Smith referring to in the following quotation? Explain why it may come about People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. - Adam Smith, The Wealth of Nations, Book IV, Chapter VIII, p. 145, para. c27.

Answer 1

Generally, in oligopoly people come together for social welfare but they end up creating a collusion that is directed towards their personal betterment. The collusion helps in creating a virtual monopoly in which the firms agree to produce less that is to create artificial shortage which increases the price of the output.

Oil Producing and Exporting Countries (OPEC) is the best example of Collusion here the oil producing countries produce less in order to achieve a higher selling price fir their output. Without collusion the firms had produced at the socially optimal level that is maximum societal welfare but due to collusion the output has reduced hence reduced welfare.

This artificial shortage increases the price of the output.

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