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Chapter 6

ECON101 Chapter Notes - Chapter 6: Production Quota, Marginal Cost, Deadweight Loss

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Corey Van De Waal

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Production Quotas and Subsidies
Governments often use two other methods of intervention in the
market for farm products:
- production quotas
- subsidies
Production quotas
- production quota: an upper limit to the quantity of a good that
may be produced in a specified period
- i.e. suppose that the dairy farmers want to limit total production
of milk to get a higher price. They persuade the government to
introduce a production quota on milk
- if the government introduced a production quota ABOVE the
equilibrium quantity, nothing would change
o b/c dairy farmers would already be producing less than the
- if a production quota set BELOW the equilibrium quantity ha big
effects, which are:
o a decrease in supply
o a rise in price
o a decrease in marginal cost
o inefficient underproduction
o an incentive to cheat and overproduce
A decrease in supply
- a production quota on milk decreases the supply of milk
- the total of the growers’ limits equals the quota
- and any production in excess of the quota is illegal
- the quantity supplied becomes the amount permitted by the
production quota, and this quantity is fixed
- the supply of milk becomes perfectly inelastic at the quantity
permitted under the quota
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