Problems: Quotas, etc.: Crony Capitalism University and Ice Cream Sandwiches II
Suppose that we consider the daily market for ice-cream sandwiches in the neighborhoods surrounding Crony Capitalism Junior University in the town of Old Stick...
Supply: Q = 500(P - 2)
Demand: Q = 11000 - 1000P
What is the equilibrium price? What is the equilibrium quantity? What is the equilibrium producer surplus? Consumer surplus? Pricey ice-cream sandwiches, aren’t they?
Suppose that Production Distribution Coordination—PDC—puts a quota ceiling of 2000 on the number of ice-cream sandwiches that can be sold in Old Stick each day, on the grounds that it does not like people eating too many frozen desserts. What is the equilibrium price? What is the equilibrium quantity? What is the equilibrium producer surplus? Consumer surplus? Deadweight loss relative to the free-market equilibrium?
Why might the standard analysis of the costs of a quota (i.e., the one in Krugman and Wells's Economics underestimate how much value the quota would destroy?
Can you make an argument that the quota is nevertheless a good thing? What is the argument? How convincing do you find it?
