ECONOMIC SECOND EDITION in MODULES S Paul Krugman Robin Wells with Margaret Ray and David Anderson MODULE 9 Supply and Demand Quantity Controls Krugman Wells The meaning of quantity controls another way government intervenes in markets How quantity controls create problems and can make a market inefficient Who benefits and who loses from quantity controls and why they are used despite their well known problems 3 of 11 Controlling Quantities A quantity control or quota is an upper limit on the quantity of some good that can be bought or sold A license gives its owner the right to supply a good 4 of 11 Controlling Quantities The demand price of a given quantity is the price at which consumers will demand that quantity The supply price of a given quantity is the price at which producers will supply that quantity 5 of 11 The Market for Taxi Rides in the Absence of Government Controls Fare per ride Quantity of rides Fare S 7 00 6 50 6 00 5 50 E 5 00 4 50 4 00 3 50 3 00 0 D 6 7 8 9 per ride 7 00 6 50 6 00 5 50 5 00 4 50 4 00 3 50 3 00 millions per year Quantity Quantity demanded supplied 6 14 7 13 8 12 9 11 10 10 11 9 12 8 13 7 14 6 10 11 12 13 14 Quantity of rides millions per year 6 of 11 Effect of a Quota on the Market for Taxi Rides Fare per ride 7 00 6 50 6 00 5 50 5 00 S Deadweight loss A The wedge E 4 50 4 00 B 3 50 3 00 D Quota 0 6 7 8 9 10 11 12 13 Fare per ride Quantity of rides millions per year Quantity demanded Quantity supplied 7 00 6 14 6 50 7 13 6 00 8 12 5 50 9 11 5 00 10 10 4 50 11 9 4 00 12 8 3 50 13 7 3 00 14 6 14 Quantity of rides millions per year 7 of 11 The Anatomy of Quantity Controls A quantity control or quota drives a wedge between the demand price and the supply price of a good The price paid by buyers ends up being higher than that received by sellers The difference between the demand and supply price at the quota limit is the quota rent 8 of 11 The Costs of Quantity Controls Deadweight loss because some mutually beneficial transactions don t occur 9 of 11 The Clams of New Jersey In the 1980s excessive fishing threatened to wipe out New Jersey s clam beds To save the resource the U S government introduced a clam quota This set an overall limit on the number of bushels of clams to be caught and allocated licenses to owners of fishing boats based on their historical catches 10 of 11 1 Quantity controls or quotas limit the quantity of a good that can be bought or sold 2 The quantity allowed for sale is the quota limit 3 Economists say that a quota drives a wedge between the demand price and the supply price 4 Quantity controls lead to deadweight loss 11 of 11