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Quota
A production quota is when the government tells the firm they can not sell more than a certain quantity of a good.
Example: The government can put a quota on the number of fishing licenses allowed (to protect the fish).
- Quotas should always be on theleftof the equilibrium quantity.
- In the diagram above the price paid by consumers and received by producers with the quota would be$12
- It doesn't matter where the output of 15 hits the supply curve because if the sellers know that consumers are willing to pay $12 (because that's where it hits demand) then that's the price they will charge.
- Quotas always lead tohigherprices andloweroutput.
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Example: Quota
Suppose the demand equation is given by P = 80 - 2Q and supply is given by P = 20 + 2Q. If a production quota leads to a price of $60, what must be the output allowed with the quota?
A) 10
B) 20
C) 30
D) 40
A.
With a quota the price is always where the quota hits the demand curve. We have to plug in 60 as the price in the demand equation:
60 = 80 - 2Q
2Q = 20
Q = 10
Practice: Quota
A production quota that is placed at an output level that is higher than the equilibrium output will: