Chapter 9, Problem 6MCQ

To determine

The question requires us to determine the result of the binding quota.

Explanation of Solution

The binding quota is also known as the effective quota. A quote puts an upper limit on the quantity sold or purchased in a market.

Price controls like quota generate inefficiency in the market because at quota sellers charge a supply price that is different from the consumer’s demand price. Both sellers and consumers face loss during the transaction as sellers receive less than their willingness to accept and buyers pay more than their willingness to pay. This loss is termed a deadweight loss. Generally, when the demand price lies above the supply price, there will be a deadweight loss in the market.

[Here, the price at which the consumers are willing to buy the product is known as the demand price. The supply price is the price at which the producers are willing to accept or sell the product.]

Quota limits the quantity that creates inefficiencies in the market due to missed opportunities. Quota prevents mutually beneficial transactions that could benefit both suppliers and buyers. Since buyers and sellers are not allowed to buy or sell the desired quantity, quota incentivizes the consumers and sellers to evade or break the law. It also generates a relative shortage in the market by reducing the quantity and raising the price.

Therefore, option “e” is correct.