Principles of Economics- Mankiw (5th) 354

Principles of Economics- Mankiw (5th) 354 - 364 PA R T F I...

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364 PART FIVE FIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY Soviet Union end up at risk. In the common-resources game in Figure 16-6, the ex- tra wells dug by Arco and Exxon are pure waste. In both cases, society would be better off if the two players could reach the cooperative outcome. By contrast, in the case of oligopolists trying to maintain monopoly profits, lack of cooperation is desirable from the standpoint of society as a whole. The mo- nopoly outcome is good for the oligopolists, but it is bad for the consumers of the product. As we first saw in Chapter 7, the competitive outcome is best for society because it maximizes total surplus. When oligopolists fail to cooperate, the quan- tity they produce is closer to this optimal level. Put differently, the invisible hand guides markets to allocate resources efficiently only when markets are competi- tive, and markets are competitive only when firms in the market fail to cooperate with one another. Similarly, consider the case of the police questioning two suspects. Lack of co-
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