EC4101 Week 6 Lecture 2 PDF

EC4101 Wk.06 Lec.02 Quantity Control/Quota: An upper limit on the quantity of a good that can be bought/sold. The total amount of the good that can be transacted is the quota limit. E.g. taxi licence quote in NY only gives a certain amount the right to provide the service, or the EU CFP’s fishing q...

EC4101 Wk.06 Lec.02 Quantity Control/Quota: An upper limit on the quantity of a good that can be bought/sold. The total amount of the good that can be transacted is the quota limit. E.g. taxi licence quote in NY only gives a certain amount the right to provide the service, or the EU CFP’s fishing quota. Demand Price at a quantity is the price at which consumers will demand the product. Supply Price at a quantity is the price at which suppliers will supply the product. As seen, the quota drives a wedge between the demand price and the supply price of a good. The difference in these prices at the quota limit is the quota rent, the earnings gained by the licence holder from the right to supply a good/service. Disadvantages of Quotas: → Deadweight loss → Incentives for illegal operations Deadweight loss is lower in all cases when the demand/supply is more inelastic. Benefit principle: The belief that people getting most benefit from public spending should pay most for it. Tax incidence: Describes who eventually bears the burden of that tax. Effects of Tax: → Raises revenue for capital and current expenditure → Discourages market activity, reducing quantity sold  → It distorts the market → Buyers pay more, sellers receive less The more inelastic the supply curve and the more elastic the demand curve, the more the final incidence will fall on the seller rather than the buyer and vice versa. I.e., the burden falls heavier of the less elastic side of the market. Choosing which products to levy: From an efficiency standpoint, goods with a very inelastic supply/demand (e.g. land/necessities) are the best to tax because an increase in price will not lead to a huge decrease in quantity supplied/demanded. However, from an equity perspective, goods with a very inelastic demand are typically necessities, so it would be unfair to levy goods people have no option but to buy. References: Notes based on EC4101 Lecture Slides and the relevant readings from Economics (12th Ed.) David Begg. Images: homework.study.com