EC4101 week 6 lecture 2

Quantity Control/Quota

• A limit on the amount of a good that can be bought or sold.
• Example: Taxi licenses in New York City or EU fishing quotas.
• Quota limit is the total amount that can be traded.
• Demand Price: Price at which consumers will buy a certain quantity of a good.
• Supply Price: Price at which suppliers will sell a certain quantity of a good.

Quota Rent

• Difference between demand price and supply price at the quota limit.
• Earnings gained by the license holder from supplying a good or service.
• Shown graphically as the wedge between supply and demand curves at the quota limit.

Disadvantages of Quotas

• Deadweight loss: Inefficiency in the market due to the reduced quantity traded.
• Incentives for illegal operations: People may engage in illegal activities to bypass the quota limit.
• It is worse when demand or supply is more inelastic.

Benefit Principle

• Belief that those who benefit most from public spending should pay the most for it.

Tax Incidence

• Describes who ultimately bears the burden of a tax.

Effects of Tax

• Raises revenue for capital and expenditure
• Discourages market activity, leading to lower quantity sold.
• Distorts the market equilibrium.
• Buyers typically bear more of the tax burden when supply is less elastic and demand more elastic and vice-versa.

Choosing which products to tax

• Goods with inelastic supply and/or demand (e.g. necessities) are efficient to tax, because price increases will not significantly reduce demand or supply.
• However, goods with inelastic demand (essential goods) should be taxed cautiously, as taxing these goods disproportionately affects low-income consumers.