Module 9 Quantity Controls

What you will learn in this Module: What are quantity controls? How do quantity controls create problems and make a market inefficient? Who benefits and who loses from quantity controls? Why they are used despite their well-known problems?

Quantity Controls: Terms to Know Quantity Control or Quota: upper limit on the quantity of some good that can be bought or sold License: gives the owner the right to supply a good or service Demand price: the price at which the consumers will want to buy (demand) that quantity Supply price: the price at which producers will want to supply that quantity

Why Impose Quantity Controls? In addition to controlling p_______, the government can also decide that the e_____________q_________ is, for some reason, too high. Government determines a q__________control, or q_______: 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 q________l_______. A quota is set and a license is given (or auctioned) to producers. A l__________ gives its owner the right to supply the good. With a partner, answer the following: What are some examples of quantity controls? Why would the government want to limit the quantity of a good that can be bought or sold? Who would benefit from this?

Why Impose Quantity Controls? In addition to controlling prices, the government can also decide that the equilibrium quantity is, for some reason, too high. 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. A quota is set, a license is given (or auctioned) to producers. A license gives its owner the right to supply the good. With a partner, answer the following: What are some examples of quantity controls? Why would the government want to limit the quantity of a good that can be bought or sold? Who would benefit from this?

Reverse Questions How many taxi rides will consumers demand if the price is $5.00 per ride? Changes to…. At what price will consumers want to buy 10 million taxi rides per year? How many pairs of socks will consumers demand if the price is $3.00 per pair? Changes to….. At what price will consumers want to buy 15 millions pairs of socks?

Market for Taxi Rides without Gov’t Controls Fare per ride 6 7 8 9 10 11 12 13 14 7.00 6.50 6.00 5,50 5.00 4.50 4.00 3.50 3.00 = S D E Fare Per Ride Quantity of Rides Quantity demanded Quantity Supplied $7.00 6 14 6.50 7 13 6.00 8 12 5.50 9 11 5.00 10 4.50 4.00 3.50 3.00 Quantity of Rides (Millions per year)

The Effect of Quotas on the Market Taxi Rides The city gov’t limits the quantity of taxi rides to 8 million per year. Fare Per Ride Quantity of Rides Quantity demanded Quantity Supplied $7.00 6 14 6.50 7 13 6.00 8 12 5.50 9 11 5.00 10 4.50 4.00 3.50 3.00

The Effect of Quotas on the Market Taxi Rides The city gov’t limits the quantity of taxi rides to 8 million per year. S 6 7 8 9 10 11 12 13 14 7.00 6.50 6.00 5,50 5.00 4.50 4.00 3.50 3.00 = D E A B The Wedge Dead weight Loss Quota Fare Per Ride Quantity of Rides Quantity demanded Quantity Supplied $7.00 6 14 6.50 7 13 6.00 8 12 5.50 9 11 5.00 10 4.50 4.00 3.50 3.00

The Effect of Quotas on Market Taxi Rides A quantity control, or quota, drives a w_______ between the demand price and the supply price of a good. Suppose at the quota of 8 million rides: Demand Price = $_______ Supply Price = $_________ If buyers are willing to pay $6, but sellers can produce at cost $4, each owner of a license to operate a taxi earns the difference of $_______. And this is the amount that any taxi operator would pay to have a license. Quota rent: The d__________ between the d__________and s__________ price It is the e____________ that accrue to the license-holder from ownership of the right to sell the good. 6 7 8 9 10 11 12 13 14 7.00 6.50 6.00 5,50 5.00 4.50 4.00 3.50 3.00 = D E A B The Wedge Dead weight Loss Quota

The Effect of Quotas on Market Taxi Rides A quantity control, or quota, drives a wedge between the demand price and the supply price of a good. Suppose at the quota of 8 million rides: Demand Price = $6 Supply Price = $4 If buyers are willing to pay $6, but sellers can produce at cost $4, each owner of a license to operate a taxi earns the difference of $2. And this is the amount that any taxi operator would pay to have a license. Quota rent: The difference between the demand and supply price It is the earnings that accrue to the license-holder from ownership of the right to sell the good. 6 7 8 9 10 11 12 13 14 7.00 6.50 6.00 5,50 5.00 4.50 4.00 3.50 3.00 = D E A B The Wedge Dead weight Loss Quota

Inefficiencies of Quantity Controls Fare Per Ride Quantity of Rides Quantity demanded Quantity Supplied $7.00 6 14 6.50 7 13 6.00 8 12 5.50 9 11 5.00 10 4.50 4.00 3.50 3.00 1. Missed o_________________: point at which the buyer is willing to buy the good at a price that the seller is willing to accept, but it doesn’t happen because it is forbidden by the q__________. This is known as d___________ l_______   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 _____________activities. Suppliers know that additional units could be supplied and buyers could be found. This kind of overproduction would violate the q________. Are there illegal taxis in New York City? 

Inefficiencies of Quantity Controls Fare Per Ride Quantity of Rides Quantity demanded Quantity Supplied $7.00 6 14 6.50 7 13 6.00 8 12 5.50 9 11 5.00 10 4.50 4.00 3.50 3.00 1. Missed opportunities: point at which the buyer is willing to buy the good at a price that the seller is willing to accept, but it doesn’t happen because it is forbidden by the quota. This is known as deadweight loss   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. Are there illegal taxis in New York City? 

Poachers Man, Poachers! Quantity controls are enacted in the fishing industry to protect species, among other goals. Draw a correctly labeled graph of the market for bluefish tuna. Draw and label a vertical line showing an effective quota. Label demand price, supply price, deadweight loss, and give the quota rent.

Poachers Man, Poachers! Quantity controls are enacted in the fishing industry to protect species, among other goals. Draw a correctly labeled graph of the market for bluefish tuna. Draw and label a vertical line showing an effective quota. Label demand price, supply price, deadweight loss, and give the quota rent. D S Price Quantity Pe Qe E Demand Price Supply Price Dead weight Loss Demand Price – Supply price = quota rent Quota

Ahhh the End of Another Section Section 2 Test is Tuesday September 10th It covers modules 5-9 The test is multiple choice and free response. Be prepared to hand in any assignment that was given for homework when asked on Friday.