If the government imposes a limit on sales of a good or service by licensing the right to sell a given quantity of the good,the difference between the demand and supply price is:
A)the quota rent.
B)the equilibrium price.
C)the quota price.
D)deadweight loss.

Question

Quizplus · Accepted Answer

The difference between the demand and supply price, which arises due to the government-imposed limit, is called quota rent. This is the extra profit or rent that license holders can earn by selling the limited quantity of the good at a price higher than the supply price. Therefore, option A is the correct choice. Option B is incorrect as equilibrium price refers to the price at which demand and supply are equal, which may or may not be affected by the quota. Option C, quota price, refers to the price at which the good or service is sold under the limit imposed by the government. Option D, deadweight loss, is the loss in efficiency or welfare that arises due to the reduction in quantity traded as a result of the quota.

If the Government Imposes a Limit on Sales of a Good