5 Applications of the Competitive Model Ch 9

5 Applications of the Competitive Model Ch 9 - 4/2/2008...

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4/2/2008 1 Chapter 9 Applications of the Competitive Model 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. PS CS DWL a c
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4/2/2008 2 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. 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.
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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 Ch 9 - 4/2/2008...

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