5 Applications of the Competitive Model

5 Applications of the Competitive Model - Applications of...

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Applications of the Competitive Model
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Quotas A quota is a limit on the quantity of a good that can be produced and traded in the market. Its purpose is to increase prices received by suppliers. A quota results in a deadweight loss of welfare to society. Let’s look at an example of a quota on chickens.
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PS CS DWL a c
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The quota allows producers to earn an economic rent = a return over and above their opportunity cost. The difference is that economic profit doesn’t include sunk costs, but economic rent does.
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If the chicken farmer wanted to sell the quota, he would charge the price which was what the quota was worth. This price would be the difference between points a and c on our diagram. The farmer who bought the quota would now just earn 0 economic profit, at c on the supply curve. The value of the quota is completely transferred to the quota seller. This is called the
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This note was uploaded on 06/18/2011 for the course ECON 2X03 taught by Professor Jamesbruce during the Fall '10 term at McMaster University.

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5 Applications of the Competitive Model - Applications of...

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