Consider Canada's east coast lobster fishery. Suppose the government sets a production quota which is below the equilibrium quantity. Relative to the free- market equilibrium, we can expect the result to be
A) an increase in price and a decrease in deadweight loss.
B) an increase in price and the introduction of a deadweight loss.
C) a decrease in price and a decrease in deadweight loss.
D) a decreased price.
E) the free- market equilibrium price and quantity because the quota is not binding.

Question

Quizplus · Accepted Answer

When a production quota is set below the free-market equilibrium, it limits the supply of lobsters in the market, causing the price to increase. This is because there is excess demand for lobsters at the quota level, resulting in a shortage. The introduction of a deadweight loss occurs because the quota creates inefficiencies in the market, causing economic efficiency to decrease. Consumers who are willing to pay a higher price are unable to purchase lobsters due to the quota, and producers who are willing to sell at a lower price are unable to do so because they cannot produce beyond the quota. Therefore, the quota results in a reduction of consumer surplus and producer surplus, contributing to a deadweight loss.

Consider Canada's East Coast Lobster Fishery