Can anyone tell me why a quota set below the market equilibrium will raise price, lower the marginal cost of producing the quota, and is inefficient because it results in underproduction? This is from am section of BSAS 2007. The only part I get is the underproduction part. How would it not lower the price? thx -
If a quota is set above the equilibrium, it will have no impact. With quotas you have excess demand (the same dd as before, but due to the quota, supply is restricted), hence the price goes up. This leads to a DWL since there are unexploited efficiencies because producers are now forced to produce less than the market is willing to buy. does that make sense?
yes, now it seems simple. thanks. I was trying to graph it and it wasn’t making sense.