Chapter 2R, Problem 23MCQ

To determine

The question requires us to determine the quota rent per pound of swordfish when the government establishes a quota of 7 million pounds.

Explanation of Solution

The following graph represents the demand and supply curves along with the quota sets by the government:

  

Without government interference, the market was at equilibrium at point E where the

Equilibrium price = $14

The equilibrium quantity of swordfish = 9 million pounds.

When government sets a quota of 7 million pounds, the consumers will have to pay a higher demand price as shown in the graph at point A which is equal to $18.

Quota rent is the difference between these prices.

Quota rent = demand price − supply price = $18 − $12 = $6.

Thus, when the government sets a quota of 7 million pounds of swordfish, $6 per pound will be rent received by the licensed fishing boat.

Thus, Option “b” is correct.

Economics Concept Introduction

A quote puts an upper limit on the quantity sold or purchased in a market. Quota brings inefficiency in the market by generating a deadweight loss.