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 or vehicle quota is Singapore. A Quota is a restriction on output as determined by governments. By setting the quota at the level of social optimal output, or Q1 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.


– Legislation + Education


Negative advertising and education/legislation could be implemented. Providing information on external costs and negative information would reduce the demand over time, and lead to a reduction in consumption. For example, governments could tell people about the harms of smoking and alcohol related problems.

Legislation such as restriction of underage consumption of alcohol, cigarettes, would completely eliminate external costs such as health problems to bystanders, or reduced crime rates from alcoholism. Over the long run, there is reduced demand, MPB shifts down to Qopt in negative consumption diagram.


The limitation of such policies are that they are long run in nature, especially for education.

It also requires governments spending intensively, which incurs opportunity costs, since such spending could be better used in other areas such as subsidizing health care, education, etc.


In short, each policies have their limitations. Demand side policies like tax should be used in short run to control the consumption of items such as cigarettes, alcohol, fuel. Quota might be better in controlling the production, in cases such as carbon trading, where firms have ability to pass on the tax to consumers. In the long run, a good mix of short run demand policies and education could be used to control consumption and force markets to internalize external costs to achieve allocative efficiency.