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414 CHAPTER 10 COMPETITIVE MARKETS: APPLICATIONS
be operated, often leading to fares higher than those that would be observed in unreg-
ulated markets.
When the government imposes a quota in a market with an upward-sloping
supply curve and a downward-sloping demand curve, we observe the following
effects:

• The market will not clear. There will be an excess supply of the good or service
in the market.
• Consumers will buy less of the good than they would in a free market.
• Consumer surplus will be lower than with no quota.
• Some (but not all) of the lost consumer surplus will be transferred to producers.
• Because there is excess supply with a quota, the size of the producer surplus will
depend on which of the producers actually supply the good. Producer surplus may
either increase or decrease with a quota. 12
• There will be a deadweight loss.

Figure 10.12 illustrates the effects of a production quota of 4 million units, for the
same market depicted in Figure 10.6. (Figure 10.12 and the following discussion as-
sume that the most efficient suppliers—those with the lowest costs—supply the 4 mil-
lion units allowed by the quota.)
With no quota, equilibrium occurs at point G, where the demand curve D and the
supply curve S intersect. At this point, the equilibrium price is $8, and the market-
clearing quantity is 6 million units per year.
Now we can compare the market with and without the quota, using Figure 10.12
to calculate the consumer surplus, producer surplus, net economic benefits, and dead-
weight loss.
With no quota, consumer surplus is the area below the demand curve and above
the price consumers pay ($8) (consumer surplus areas A B F $36 million per
year). Producer surplus is the area above the supply curve and below the price produc-
ers receive (also $8) (producer surplus areas C E $18 million per year). The
net economic benefit is $54 million per year (consumer surplus producer surplus),
and there is no deadweight loss.
With the quota, consumers will pay $12 per unit (point H ). Producers would
like to supply 10 million units at that price but are limited to the quota of 4 million
units, so there will be an excess supply of 6 million units. Consumer surplus is the
area below the demand curve and above the price consumers pay ($12) (consumer
surplus area F $16 million per year). Producer surplus is the area above the
supply curve (between points J and K, since we are assuming that the most efficient
suppliers produce all 4 million units) and below the price producers receive (also
$12) (producer surplus areas A E $32 million per year). The net economic
benefit is $48 million per year (consumer surplus producer surplus), so the dead-
weight loss is $6 million per year (net economic benefit with no quota net eco-
nomic benefit with quota).
The reduction in consumer surplus occurs because the quota supports the
price at $12, well above the $8 equilibrium price in a competitive market. The size

12 If the most efficient producers serve the market, producer surplus will increase for some levels of the
quota. However, if the quota is too low (e.g., close to zero), producer surplus could actually decrease.