Hi All, How is that qoutas(imposed below the equilibrium quantity of production) lead to a situation of Marginal benefit exceeding Marginal cost? I thought that Marginal benefit to society would decrease because of a consequnt increase in prices? Please advise. Thanks!
People. Any inputs?
Well, in your example you have to assume that the quota is set below the equilibrium quantity. If its above the equilibrium quantity it will have no effect. However, in an example where its set below it, producers are able to produce less of a product while receivng a higher price for it since demand goes up as result of only a limited amount that can be produced. I know thats not the complete answer your looking for but thats the general idea behind it.
Remember demand curve is the Marginal Benifit curve Supply curve is the Marginal Cost curve… Now, Assume tht demand and supply are in equilibriuim… Equilibrium qty demanded = 300 kgs of rice Equilibrium price = 10 Suppose the govt imposes the a quota on rice farmers that only 250 Kgs (250\<300) of rice can be produced....(instead of the 300 Kgs that is DEMANDED and SUPPLIED in the market) So the supply curve will shift upwards and will intersect the demand curve at a price greater then the equilibrium price of 10 i.e. say $12…so this means that the rice will go to that ppl who value it the most …there will be an underproduction of rice in the market and will result in a dead weight loss… Hence the Marginal Benifit will greater than the Maginal Cost…!!.. Hope this Helps!!
varundarji Wrote: ------------------------------------------------------- > So the supply curve will shift upwards and will > intersect the demand curve at a price greater then > the equilibrium price of 10$ i.e. say $12…so > this means that the rice will go to that ppl who > value it the most …there will be an > underproduction of rice in the market and will > result in a dead weight loss… > Is this true? I don’t think supply curve will shift in this case.
revenant Wrote: ------------------------------------------------------- > varundarji Wrote: > -------------------------------------------------- > ----- > > So the supply curve will shift upwards and will > > intersect the demand curve at a price greater > then > > the equilibrium price of 10$ i.e. say $12…so > > this means that the rice will go to that ppl > who > > value it the most …there will be an > > underproduction of rice in the market and will > > result in a dead weight loss… > > > > Is this true? I don’t think supply curve will > shift in this case. I think it should be a movement along the curve.
The supply curve will not shift. Because of the drop in supply, the marginal benefit (the benefit derived from another unit of product) would increase as you are going up the demand curve.
Yeah if theres a shift and new intersection point, there should not be any deadweight loss unless theres price ceiling or floor.
O yes…that was my mistake…it shiould be a movement along the supply curve!
Thanks All!