Quotas and Marginal Benefit society, exceeding, benefit, situation, quantity

sweetgirl

Hi All,

How is that qoutas(imposed below the equilibrium quantity of production) lead to a situation of Marginal benefit exceeding Marginal cost?

I thought that Marginal benefit to society would decrease because of a consequnt increase in prices?

Please advise.

Thanks!

mnieman

Remember demand curve is the Marginal Benifit curve
Supply curve is the Marginal Cost curve....

Now,
Assume tht demand and supply are in equilibriuim....
Equilibrium qty demanded = 300 kgs of rice
Equilibrium price = $10

Suppose the govt imposes the a quota on rice farmers that only 250 Kgs (250<300) of rice can be produced....(instead of the 300 Kgs that is DEMANDED and SUPPLIED in the market)

So the supply curve will shift upwards and will intersect the demand curve at a price greater then the equilibrium price of 10$ i.e. say $12....so this means that the rice will go to that ppl who value it the most ....there will be an underproduction of rice in the market and will result in a dead weight loss....

Hence the Marginal Benifit will greater than the Maginal Cost..!!...


Hope this Helps!!

trogulj

varundarji Wrote:
-------------------------------------------------------
> So the supply curve will shift upwards and will
> intersect the demand curve at a price greater then
> the equilibrium price of 10$ i.e. say $12....so
> this means that the rice will go to that ppl who
> value it the most ....there will be an
> underproduction of rice in the market and will
> result in a dead weight loss....
>

Is this true? I don't think supply curve will shift in this case.

dcfox83

revenant Wrote:
-------------------------------------------------------
> varundarji Wrote:
> --------------------------------------------------
> -----
> > So the supply curve will shift upwards and will
> > intersect the demand curve at a price greater
> then
> > the equilibrium price of 10$ i.e. say $12....so
> > this means that the rice will go to that ppl
> who
> > value it the most ....there will be an
> > underproduction of rice in the market and will
> > result in a dead weight loss....
> >
>
> Is this true? I don't think supply curve will
> shift in this case.


I think it should be a movement along the curve.

Bulla564

The supply curve will not shift. Because of the drop in supply, the marginal benefit (the benefit derived from another unit of product) would increase as you are going up the demand curve.

dontknow1987

Yeah if theres a shift and new intersection point, there should not be any deadweight loss unless theres price ceiling or floor.

eagles_dare13

O yes...that was my mistake...it shiould be a movement along the supply curve!

Flok

Thanks All!