Compensation and the Twin Producer Gains from Production Quotas

Abstract

The limited theory on production quotas focuses on the impact of introducing quotas when otherwise the market would be competitive. We develop a model also on the effect of removing quotas, and then consider the combined effects of both introducing and removing quotas. Under the value of quota approach, the amount of money spent by the government for the buyout (i.e., value of quota) is equal to the sum of the net gain to producers when the quota was introduced plus the net gain if it were removed. Compensation is the key to a quota buyout, as producers have little interest in politically supporting a government compensated buyout unless they gain by so doing.