Suppose the government does not provide an incentive payment to producers under a production quota policy, and the amount that may be produced and sold by firms is limited by law in order to raise the market price to the support price. Do producers still gain surplus value under this version of the production quota policy?
A) Yes, they would always achieve a larger producer surplus under this version of the policy.
B) Yes, as long as the surplus value gained from consumers exceeds the amount of producer surplus lost from production quantities that are no longer produced.
C) No, they would always face a decrease in producer surplus without the government incentive payment.
D) No, the change in producer surplus is always negative due to the gains achieved by consumers.

Question

Quizplus · Accepted Answer

Even without a government incentive payment, producers may still gain surplus value under a production quota policy that limits production and raises market prices to the support price. However, the gain in producer surplus would depend on whether the surplus value gained from consumers exceeds the losses in producer surplus due to the reduction in production quantities. In other words, if the increase in market price is enough to compensate for the decrease in production quantity, producers could still benefit from the policy. However, if the decrease in quantity reduces producer surplus more than the increase in price compensates for, then producers would face a decrease in surplus value.

Suppose the Government Does Not Provide an Incentive Payment to Producers