Inflated Production Quota Gains Paid for by a Consumption Tax

Abstract

We consider a production quota buyout that is paid for by a consumption tax. If producers are paid the true value of the quota via a consumption tax, the net producer gain is zero for the combined introduction and removal of quota (even though the quota value is positive) since the net gain to producers when the quota was introduced is equal to the net loss to producers when the production quota is removed. Therefore, the quota value does not measure the producer net gain from both the introduction and removal of the production quota. The quota value merely represents the consumption tax amount. This is also true if producers are paid (which is often the case) an inflated quota value that is more than the true quota value.