Quota or license (usually used for negative production like factory)

Quota or license (usually used for negative production like factory)

Quota diagram

Quota diagram

 

Government can use a quota to limit the quantity of certain goods or services produced in a country. An example of quota would be carbon trading schemes in the case of negative productions. A QUota is a restriction on output as determined by governments. By setting the quota at the level of social optimal output, or Qopt from diagram, the markets will be forced to consume at the social optimal output and achieve allocative efficiency. The supply therefore is perfectly price inelastic and output does not respond to price change.

 

 

 

The limitation of a quota is it leads to extremely high price fluctuations for given change in demand. This might lead to equity problems especially in the consumption of fuel, since fuel is a basic economic necessity, and in some countries, even require subsidies.

By |2015-10-09T23:20:28+00:00October 9th, 2015|Economics resources, Micro: Demand & Supply|0 Comments

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