True or False: Explain your answer.
To regulate the collusive oligopoly, the government has to force the firms to sell at a price at which the marginal cost curve of the firm crosses the collusive demand curve for the output of the firm. This condition is the same for the marginal cost and demand curves of the industry since they are just the horizontal sum of the individual firms' curves. A correct government policy requires that the authorities have this information. As demonstrated in Figure 1, the correct regulation of the oligopolistic firms does not necessarily remove all their profits. To prevent firms from getting an advantage from their oligopolistic situation, the government would have to tax these profits away. The tax must be lump sum to avoid affecting the level of output.