Production quota & subsidies - Welfare Economics

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Production quota & subsidies



Production Quota & Subsidies

There are two more ways for the government to intervene in products.

Production Quota: government sets a limit to the quantity of a good that may be produced in a specified time.

Subsidy: Payment made by the government, given to the producer.

Effects from Production Quotas

Looking at the graph, we can see that production quotas does the following things:
  1. Decrease the quantity (supply)
  2. Increase in price
  3. Decrease in marginal cost
  4. Underproduction
  5. Increases the incentive to cheat (produce more than the quota)
Effect from production quotas decrease supply increase price decrease marginal cost underproduction

Effects from Subsidies

When subsidies are given to producer, they would want to producer more. So, the supply curve shifts to the right.

Looking at the graph, we see that subsidies does the following things:
  1. Increases the supply (curve shifts to the right)
  2. Decrease the price
  3. Increase in quantity produced
  4. Increase in marginal cost
  5. Overproduction
Effect from subsidies increase supply decrease price increase marginal cost overproduction

Note: Producers are willing to produce more (even though it sells for less) because of the subsidy that the government gives.

Subsidies are not efficient because it gives deadweight loss.

Subsidies are not efficient because it gives deadweight loss
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Production quota & subsidies

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