In a perfectly competitive market, a production quota:
A)sets a limit on the level of imports of a good.
B)has the effect of keeping the market price below the equilibrium level.
C)will create excess supply in the market.
D)creates no deadweight loss.

Question

Quizplus · Accepted Answer

In a perfectly competitive market, a production quota sets a limit on the amount of output that can be produced by producers. This means that some producers will be unable to produce at the quota level, leading to excess supply in the market. This excess supply will cause the market price to fall below the equilibrium level, as producers compete to sell their output. Therefore, option C is correct as it states that a production quota creates excess supply in the market. Furthermore, in a perfectly competitive market, any deviation from the equilibrium level results in deadweight loss, so option D is incorrect. Lastly, option A is incorrect as production quotas do not limit imports, only domestic production. In a perfectly competitive market, the market price is determined by the intersection of the demand and supply curves. If a production quota is imposed, it sets a limit on the quantity that can be produced and sold in the market. This leads to a reduction in supply and a shift in the supply curve to the left. As a result, the market price rises to a level where the quantity demanded equals the quantity supplied, but at a level below the previous equilibrium price. This creates excess supply in the market, as producers are willing to supply more than what consumers demand at the given price. Since there is excess supply, some producers will not be able to sell all of their output, leading to inefficiencies in the market and a deadweight loss.

In a Perfectly Competitive Market, a Production Quota