Figure 5-8 The Inefficiency of Output Quotas
One Final Application: Output Quotas
Before ending this chapter, it is useful to consider one final application of
government intervention in a competitive market, and to examine the
effects on overall economic surplus and market efficiency. Figure 5-8
illustrates the effects of introducing a system of output quotas in a
competitive market. Output quotas are commonly used in Canadian
agriculture, especially in the markets for milk, butter, and cheese. Output
quotas are sometimes used in other industries as well; for example, they
are often used in large cities to regulate the number of taxi drivers.
Binding output quotas lead to a reduction in output and a reduction in
overall economic surplus. The free-market equilibrium is at point E with
price and quantity Suppose the government then restricts total
quantity to by issuing output quotas to firms. The market price rises to
p 0 Q 0.
Q 1