A quota below the equilibrium quantity in the market for shrimp will cause inefficiency because mutually beneficial transactions will not occur.

Question

Quizplus · Accepted Answer

When a quota is set below the equilibrium quantity, it reduces the supply of shrimp in the market. This leads to an increase in the price of shrimp and a decrease in the quantity demanded. As a result, some potential buyers will be unable to purchase the shrimp at the new higher price, while some sellers will be unable to sell their shrimp at the new lower quantity demanded. This creates inefficiency in the market as mutually beneficial transactions, where both buyers and sellers would have been better off, will not occur due to the quota restriction.

A Quota Below the Equilibrium Quantity in the Market for Shrimp