Quantity Controls:QuotasStudents will analyze the implications of a quota system in the real world to demonstrate understanding of a quota

NYC Taxi Medallion• 1930s = 11,787• 2014 = 13,257• Issued for a fee of

$10.00 per license

• Today, these medallions are sold for upwards of $10,000.00 per license

• Quota system: gov’t regulation of quantity

Market for Taxi Rides in NYC• Demand Price:

the price at which consumers want to buy a given quantity ($5.00)

• Supply Price: the price at which producers will supply a given quantity ($5.00)

NYC Taxi Ride Market w/ Quote• Consumers willing

to pay $6.00 per ride

• Suppliers willing to accept $4.00 per ride

• HUGE impact on the market for taxi rides!

Quotas Effects—Deadweight Loss• Graph shows us 2

transactions: • 1) Taxi Rides ($4.00

and $6.00)• 2) Medallions (the

“wedge”)• The “wedge” is the

quota rent—range between demand price and supply price that gives us the value/rent of the license (medallion) per transaction

Quotas Effects—Deadweight Loss(cont.)

• Deadweight Loss: missed opportunities from not operating at equilibrium due to intervention

• Rule: when demand price exceeds supply price there will be deadweight loss

• Missed gains experienced by buyers and sellers

D.L. = 1/2B×H

Quick Note• Just like price floors and ceilings quotas can be ineffective

when the quota (quantity control) they impose is greater than equilibrium

• Quota>E.Q. = ineffective• Price floor>E.P. = ineffective