Quantity Controls: Quotas

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Presentation transcript:

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