Common Student Difficulties

Name _______________________________
Section 2
Module 9: Supply and Demand: Quantity Controls
Lecture Notes
Pump Primer
Who benefits and who loses from quantity controls?
Learning Objectives:
The meaning of quantity controls, another way government intervenes in markets.
How quantity controls create problems and can make a market inefficient.
Who benefits and who loses from quantity controls, and why they are used despite their well
known problems.
Key Economic Concepts for This Module:
The graph below shows a hypothetical quota limit in the
market for salmon.
A quantity control, or quota, limits the number of
transactions that can be made. Only producers with an
official license of some sort can sell the good or service.
This policy creates a wedge between the demand price (Pd)
and supply price (Ps), and creates inefficiency.
The difference between the demand and supply prices is
known as the quota rent that represents money that accrues to the holders of licenses.
The purpose of this module is to demonstrate that government can
also regulate the quantity of a good or service that is produced.
These quantity controls are sometimes necessary, but also create
economic inefficiencies.
Controlling Quantities
In addition to controlling prices, the government can also decide
that the equilibrium quantity is, for some reason, too high.
A _________ is set, a license is given (or auctioned) to producers.
A _______________ gives its owner the right to supply the good.
So government determines a: quantity control, or quota: an upper limit on the quantity of some good
that can be bought or sold.
The total amount of the good that can be legally transacted is the quota limit.
 Why would we want to limit the quantity of a good that can be bought or sold?
 Can you think of any production that is limited?
 Who would benefit from this?
The Anatomy of Quantity Controls
Example Suppose we consider the market for ocean
caught salmon.
Assume that equilibrium: Qe =50, Pe =$60
Suppose the salmon are becoming gravely endangered:
Quota = 40
Licenses are allocated, each giving the salmon boat the
right to harvest a certain amount of salmon every year.
When the total quota limit is reached the season is
The _______________ price Pd is the price at which consumers will demand that quantity.
The _______________ price Ps is the price at which producers will supply that quantity.
A quantity control, or quota, drives a ___________ between the demand price and the supply
price of a good.
Suppose at the quota of 40:
Demand Price = $80
Supply Price = $50
If buyers are willing to pay $80, but sellers can produce at cost of $50, each owner of a license to
fish salmon earns the difference of $30. Moreover, this is the amount that any salmon boat would
pay to have a license.
Quota ________ is the difference between the demand and supply price
The earnings that accrue to the license-holder from ownership of the right to sell the good.
It is equal to the market price of the license when the licenses are traded.
We can also think of the quota rent as the opportunity cost the holder of the license bears for not
renting out his license to another producer.
The Cost of Quantity Controls
_____________________ loss is the lost gains associated with transactions that do not occur due
to market intervention.
Inefficiency: In the form of mutually beneficial transactions that don’t occur. Anytime the
demand price at a given quantity is not equal to the supply price at that quantity, there will be
missed opportunities.
Incentives for illegal activities. Suppliers know that additional units could be supplied and
buyers could be found. This kind of overproduction would violate the quota.
In the salmon example, this is illegal fishing, or poaching.
Common Student Difficulties:
Rather than creating a horizontal gap between quantity demand and supply, this policy simply
creates a vertical gap between demand price and supply price.
A simple numerical example, such as the one provided by the textbook, can help to explain the
difficult concept of quota rent.