Chapter 5: Price Controls and Quotas - Controlling Quantities

Question 1

What is a quantity control/quota?

Answer 1

• an upper limit on the quantity of some good that can be bought or sold

Question 2

What is a quota limit? (2)

Answer 2

• the total amount of the good that can be legally transacted
  ex. taxi medallion system in NY or taxi license systems in Toronto or vancouver

Question 3

What is a license?

Answer 3

• gives its owner the right to supply a good

Question 4

What is demand price of a given quantity?

Answer 4

• price at which consumers will demand the quantity

Question 5

What is the supply price of a given quantity?

Answer 5

• price at which producers will supply that quantity

Question 6

Effect of quota on the market for taxi rides graph

Answer 6

Question 7

What is a wedge?

Answer 7

• like a price floor, price is above equilibrium for quota
• but instead of a surplus, the policy creates a wedge between the demand price and the supply price of a good
• which is the price paid by buyers ends up being higher than that received by sellers

Question 8

What happens if the quotas are auctioned off?

Answer 8

• the price of the “right to sell” will be equal to the wedge

Question 9

What are the “costs” for quantity control? (3)

Answer 9

• deadweight loss because some mutually beneficial transactions do not occur
• there are incentives for illegal activities
• ex unlicensed cabs provide opportunity for alternate models like Uber
  -ex. bootleg coal mines