Wize University Microeconomics Textbook > Efficiency
CS and PS with Quotas
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CS and PS with Quotas
- Consumer surplus is the area above the price (remember in a quota the price is where the new quantity hits the demand curve) but below the demand which is10*(80-60)*1/2 = $100
- Producer surplus is the area below the price but above the supply which is(10*20)+(10*20*1/2) = $300
- DWL is the triangle between the old and new equilbrium quantity which is(15-10)*(60-40)*1/2 = $50
Wize Tip
The consumer surplus, producer surplus and DWL for quotas and price floors are exactly the same! This is because both graphs lead to lower output and higher price.
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Example: CS, PS, DWL with Quotas
Suppose the demand is P = 250 - 3Q and supply is P = 50 + Q. If there is a quota of 40, what would be the consumer surplus, producer surplus and deadweight loss?
Plug the quantity of 40 into the supply and demand equations:
P = 50 + 40
P = 90
P = 250 - 3(40) = 130
Producer surplus = (40*40*1/2) + (40*40) = $2400
Consumer surplus = 40 * (250-130) * 1/2 = $2400
DWL = (50 - 40) * (130 - 90) * 1/2 = $200