The question requires us to determine the price of a fishing license when a quota and fishing licenses are traded in the market.
Explanation of Solution
The following graph represents the demand and supply
Without government interference, the market was at equilibrium at point E where the
The
When government sets a quota of 7 million pounds, the consumers will have to pay a higher demand price as shown in the graph at point A which is equal to $18.
Quota rent is the difference between these prices.
Quota rent = demand price − supply price = $18 − $12 = $6.
Thus, when the government sets a quota of 7 million pounds of swordfish, the price of a fishing license will be $6 per pound.
Option “b” is correct.
A quote puts an upper limit on the quantity sold or purchased in a market. Quota brings inefficiency in the market by generating a
Chapter 2R Solutions
Krugman's Economics For The Ap® Course
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