Quantity Controls:
Quotas
Students will analyze the implications of a quota system in
the real world to demonstrate understanding of a quota
NYC Taxi Medallion
• 1930s = 11,787
• 2014 = 13,257
• Issued for a fee of
$10.00 per license
• Today, these
medallions are sold
for upwards of
$10,000.00 per
license
• Quota system: gov’t
regulation of quantity
Market for Taxi Rides in NYC
• Demand Price:
the price at
which
consumers want
to buy a given
quantity ($5.00)
• Supply Price: the
price at which
producers will
supply a given
quantity ($5.00)
NYC Taxi Ride Market w/ Quote
• Consumers willing
to pay $6.00 per
ride
• Suppliers willing to
accept $4.00 per
ride
• HUGE impact on the
market for taxi
rides!
Quotas Effects—Deadweight Loss
• Graph shows us 2
transactions:
• 1) Taxi Rides ($4.00
and $6.00)
• 2) Medallions (the
“wedge”)
• The “wedge” is the
quota rent—range
between demand
price and supply
price that gives us
the value/rent of
the license
(medallion) per
transaction
Quotas Effects—Deadweight Loss
(cont.)
• Deadweight Loss:
missed
opportunities from
not operating at
equilibrium due to
intervention
• Rule: when demand
price exceeds supply
price there will be
deadweight loss
• Missed gains
experienced by
buyers and sellers
D.L. = 1/2B×H
Quick Note
• Just like price floors and ceilings quotas can be ineffective
when the quota (quantity control) they impose is greater than
equilibrium
• Quota>E.Q. = ineffective
• Price floor>E.P. = ineffective