ECON101 Chapter Notes - Chapter 6: Production Quota, Marginal Cost, Deadweight Loss
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ECON101 Full Course Notes
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Governments often use two other methods of intervention in the market for farm products: 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: b/c dairy farmers would already be producing less than the quota. If a production quota set below the equilibrium quantity ha big effects, which are: a decrease in supply, a rise in price, a decrease in marginal cost, inefficient underproduction, an incentive to cheat and overproduce. A production quota on milk decreases the supply of milk. The total of the g(cid:396)owe(cid:396)s" limits e(cid:395)uals the (cid:395)uota. And any production in excess of the quota is illegal.