Question

Suppose a country is trying to limit gasoline consumption by setting a consumption quota that is less than the equilibrium consumption in the absence of the quota. Please use a supply and demand curve to illustrate the impacts of this quota policy on the following aspects:

a. The equilibrium quantity and price with the quota

b. Changes in consumer surplus and producer surplus

c. Instead of a quota policy, what is the tax rate that will bri ng consumption/production to the same level as the quota?

Answer 1

a)The government wants to reduce consumption of gasoline and so imposes a quota . A quota is a control used by the government to limit import.Suppose the government sets a quota of 2 million barrels , consumers and producers will have to reduce consumption and production to that level.As a result of quota prices increases from $2.5 per gallon to $3 per gallon in the fig.Producers will increase the price to $3 since consumers are ready to pay more.

b)The government puts a restriction on quantity and price increased . Consumers surplus will be less than producers surplus. as shown in the graph.

c)Instead of a quota policy , tariffs will bring consumption/production to the same level as quota.Quotas are similar to tariff .Tariffs work with prices just as quotas work with quantity.Tariff is a tax on import.If the government imposes tariff,prices will rise and consumption will fall .However tariff increases output as higher prices makes producers produce more.

SAuoto eodar 3-0 5 3-5 2 Cs Phoduen's Aupl