Quantity Controls

• Quotas are limits imposed by the government on the quantity of goods that can be sold during a period of time.
• A quota is considered effective only if it is set below the initial equilibrium quantity in the free market.
• When a quota is imposed in the market,

  Consumer expenditure = Producer revenue = 0 Q2 b P2

  
• When a quota is imposed in the market, the change in market price and quantity of the good are in opposite directions, hence the final effect on consumer expenditure depends on the PED.
• If the market is efficient to begin with, quotas distort price signals and lead to a loss of allocative efficiency.
• When a quota imposed in the market,

  Customer surplus: P2 c P3

  Producer surplus: P0 a c P2

  Deadweight loss: a b c

  
• Quota has a regressive effect if the goods concerned are necessities, which would lead to greater inequity. However, if the producers are a disadvantaged group, quotas helps reduce inequity instead.
• Implementation problems of quotas:

  • Rise of Black markets, which undermines effectiveness of quotas
  • Cost in enforcing quotas on firms
• When demand is price elastic, DDe:

  • Price increases from P1 to P2
  • Quantity demanded decreases from Q1 to Q2
  • Since change in price < change in quantity, consumer expenditure decreases

  
• When demand is price inelastic, DDi:

  • Price increases from P1 to P3
  • Quantity demanded decreases from Q1 to Q2
  • Since change in price > change in quantity, consumer expenditure increases