Quantity Controls Quotas Students will analyze the implications
- Slides: 7
Quantity Controls: Quotas Students will analyze the implications of a quota system in the real world to demonstrate understanding of a quota
NYC Taxi Medallion • 1930 s = 11, 787 • 2014 = 13, 257 • Issued for a fee of $10. 00 per license • Today, these medallions are sold for upwards of $10, 000. 00 per license • Quota system: gov’t regulation of quantity
Market for Taxi Rides in NYC • Demand Price: the price at which consumers want to buy a given quantity ($5. 00) • Supply Price: the price at which producers will supply a given quantity ($5. 00)
NYC Taxi Ride Market w/ Quote • Consumers willing to pay $6. 00 per ride • Suppliers willing to accept $4. 00 per ride • HUGE impact on the market for taxi rides!
Quotas Effects—Deadweight Loss • Graph shows us 2 transactions: • 1) Taxi Rides ($4. 00 and $6. 00) • 2) Medallions (the “wedge”) • The “wedge” is the quota rent—range between demand price and supply price that gives us the value/rent of the license (medallion) per transaction
Quotas Effects—Deadweight Loss (cont. ) • Deadweight Loss: missed opportunities from not operating at equilibrium due to intervention • Rule: when demand price exceeds supply price there will be deadweight loss • Missed gains experienced by buyers and sellers D. L. = 1/2 B×H
Quick Note • Just like price floors and ceilings quotas can be ineffective when the quota (quantity control) they impose is greater than equilibrium • Quota>E. Q. = ineffective • Price floor>E. P. = ineffective
