Supply and Demand: Quantity Controls - Abernathy

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Supply and Demand: Quantity
Controls
Controlling quantities
• Quantity control or quota
▫ Is an upper limit on the quantity of some good that can
be bought or sold
• This a government action and typically government
limits quantity in a market by issuing a license
▫ Only people with the license can get the supplied good
 Examples:
 Foreign currency
 Quantity of clams NJ fishing boats can catch
 NY taxi medallions
• Most cases quantity controls are introduced to
solve an immediate problem but become
politically hard to remove later
• Quantity controls have certain predictable and
undesirable economic consequences
Quantity controls ask two questions
 At what price will consumers want to buy x per year?
 The price at which consumers want to buy a given
quantity is the demand price
 At what price will producers want to supply x per
year?
 The price at which producers will supply a give quantity
is the supply price.
• In every case in which supply is legally restricted
there is a wedge between the demand price and
supply price of the quantity transacted
▫ This is called quota rent
 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.
Cost of quantity controls
• Inefficiency due to missed opportunities
▫ Quantity controls prevent mutually beneficial
transactions from occurring
▫ This is also known as dead weight loss
 The lost gains associated with transactions that do
not occur do to market intervention.
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