The market for taxi rides has a downward sloping demand and an upward sloping supply.

What happens in the market for taxi rides if a quota is imposed on this market?

Choose 1 answer:
(A) Producer surplus increases but total surplus decreases.
(B) Consumer surplus increases and total surplus increases.
(C) There will be a surplus.
(D) The marginal benefit of the quantity sold is less than the marginal cost of the quantity sold.
(E) Consumer surplus increases but total surplus decreases.

Question

The market for taxi rides has a downward sloping demand and an upward sloping supply.

What happens in the market for taxi rides if a quota is imposed on this market?

Choose 1 answer:
(A) Producer surplus increases but total surplus decreases.
(B) Consumer surplus increases and total surplus increases.
(C) There will be a surplus.
(D) The marginal benefit of the quantity sold is less than the marginal cost of the quantity sold.
(E) Consumer surplus increases but total surplus decreases.

Accepted Answer

∻Solution∻ ‖ a ⋮ Quota Impact on Surplus: A quota restricts the quantity supplied in the market, which can lead to a decrease in total surplus. ‖ ‖ b ⋮ Producer Surplus Change: With a quota, the supply is limited, which can increase the price and potentially increase producer surplus if the new price is above the equilibrium price. ‖ ‖ c ⋮ Consumer Surplus Change: A higher price due to a quota typically reduces consumer surplus because consumers are paying more for the same quantity or receiving a lower quantity for the same price. ‖ ‖ d ⋮ Market Surplus: The imposition of a quota typically leads to a deadweight loss, which is a loss of total surplus (sum of consumer and producer surplus). ‖ ‖ e ⋮ Marginal Benefit vs. Marginal Cost: When a quota is imposed, the quantity sold is not at the equilibrium where marginal benefit equals marginal cost, leading to inefficiency. ‖ ∻Answer∻ ⚹ (A) Producer surplus increases but total surplus decreases. ⚹ ∻Key Concept∻ ⚹ Quotas and Total Surplus ⚹ ∻Explanation∻ ⚹ A quota typically decreases total surplus due to the creation of a deadweight loss, even though it may increase producer surplus by raising prices above the equilibrium level.◊How does the imposition of a quota affect consumer and producer surplus in the market for taxi rides?⍭ Generate me a similar question◊⚹

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