Chapter 5, Problem 9P

To determine

In Maine, you must have a license to harvest lobster commercially; these licenses are issued yearly. The state of Maine is concerned about the dwindling supplies of lobster found off its coast. The state fishery department has decided to place a yearly quota of 80,000 pounds of lobster harvested in all Maine waters. It has also decided to give licenses this year only to those fishermen who had licenses last year. The accompanying diagram shows the demand and supply curves for Maine lobsters.

1. Based on the hypothetical demand and supply diagram, state the market equilibrium price and quantity
2. The demand price at which consumers are willing to purchase 80,000 pounds of lobster.
3. The supply price at which sellers are willing to supply 80,000 pounds of lobsters.
4. The quota rent per pound of lobster when 80,000 pounds are sold and illustrate the quota rent and the deadweight loss on a diagram.
5. A transaction that is beneficial to both the buyer and the seller but is prevented by the quota restriction.

Concept Introduction:

Quota Rent:

It is the economic rent that is accrued to the owner of the quota. It is calculated as

(Post quota per unit price of the product- Free market per unit price of the product) x quota amount