Module Supply and Demand: Quantity Controls 9 KRUGMAN'S MACROECONOMICS for AP* Margaret Ray and David Anderson

What you will learn in this Module: 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

Controlling Quantities Quantity Control - Quota Licenses In addition to controlling prices, the government can also decide that the equilibrium quantity is, for some reason, too high.   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. Questions for the students: 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 A quota is set, a license is given (or auctioned) to producers.   A license gives its owner the right to supply the good. Note: Excellent examples of quota limits are fishing limits. The instructor might provide the students with an article about depleted ocean fisheries or fishing seasons that have been completely closed to protect the stock of a species (i.e., salmon, swordfish, lobster,…).

The Anatomy of Quantity Controls The demand price Pd: the price at which consumers will demand that quantity.   The supply price Ps: the price at which producers will supply that quantity. A quantity control, or quota, drives a wedge 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 $50, each owner of a license to fish salmon earns the difference of $30. And this is the amount that any salmon boat would pay to have a license. quota rent: 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. Demand Price Supply Price Wedge - Quota Rent

The Cost of Quantity Controls   1. 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. 2. 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. Deadweight Loss