8. Controlling quantities Aa Aa The following graph shows the market for Marylan

Question

8. Controlling quantities Aa Aa The following graph shows the market for Maryland crab. Suppose the state of Maryland limits the crab harvest to 500 million pounds per year in Maryland waters in order to prevent over-crabbing. The state issues 2,000 crabbing licenses that allow each license holder to harvest 250,000 pounds of crab per year PRICE (Dollars per pound) 10 Quota Deman 200 400 600 800 1000 QUANTITY (Millions of pounds per yearl Use the graph to fill in the following table Quantity (Millions of pounds) Demand Price (Dollars per pound) Supply Price (Dollars per pound) Quota Rent (Dollars per pound) Without quota With quota Recall that each of the 2,000 licenses allows the holder to harvest 250,000 pounds of crab per year from Maryland waters. Assuming licenses can be freely exchanged, the market value of one Maryland crab crabbing license is

Explanation / Answer

(1)

(a) Without quota,

Quantity = 600 million

Demand price = $6

Supply price = $6

(b) With quota,

Quantity = 500 mllion

Demand price = $5

Supply price = $7

Quota rent = 500 million x $(7 - 5) = 500 million x $2 = $1000 million

(2) Market value of 1 licence = 250,000 x $(7 - 5) = 250,000 x $2 = $500,000

(3) Quota prevents (600 - 500) = 100 million worth transaction.

(4) Deadweight loss = (1/2) x (600 - 500) million x $(7 - 5) = (1/2) x 100 million x $2 = $100 million

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