How to Calculate the Quota Rent on Supply & Demand
Original post by Edriaan Koening of Demand Media
A government may impose a quota on a certain product for various reasons, for example to keep natural resources sustainable or to protect domestic producers. Because of the quota, the quantity of products being traded changes and the price changes as well. Quota rent refers to the economic benefit gained by the party who sells the same products at a higher price. By illustrating the situation on a supply and demand graph, you can find the quota rent.
Draw a graph with the vertical axis representing price and the horizontal axis representing quantity. Label the price and quantity ranges of the product under quota along both axes. For example, label the price axis with the numbers $0 to $1,000 and the quantity axis with the numbers 0 to 500.
Find out the levels of supply and demand at various price points for the product under quota. For example, a coffee table may have a demand quantity of 700 and a supply quantity of 200 at the price of $200. The same product may have a demand quantity of 300 and a supply quantity of 600 at the price of $600.
Mark a point on the graph for each price point. Connect all the supply points and all the demand points to get a demand-and-supply graph. Each line will cut across the graph diagonally and the two lines will meet at one point. This point shows the price and quantity at which the product is traded if there were only domestic demand and domestic supply.
Mark the price level at which the product is being traded in the world market to take into account demand and supply levels from other countries. Draw a horizontal line from the price axis across the graph. For example, The supply and demand lines for coffee tables may intersect at the price of $500 and the quantity of 550. However, importation of coffee tables pushes the price down to $400. Draw a horizontal line along the price point of $400.
Draw a vertical line down from the point where the horizontal line from Step 4 meets the demand line and another vertical line where it meets the supply line. Bring these vertical lines down to meet the horizontal axis of the graph. The space between the two vertical lines shows the quantity of products being imported. For example, if the lines intersect the horizontal axis at 400 and 600, then there are 200 coffee tables being imported into the country at the price of $400.
Determine the quota quantity imposed by the government. For example, the government may limit the number of coffee tables being imported into the country to 100. Find the horizontal level below the intersection of the supply and demand lines where the distance between the supply and demand line is 100. Draw a horizontal line along this level between the supply and demand lines.
Draw a vertical line down from each of the two ends of the horizontal line you drew in Step 6 until it meets the horizontal axis of the graph. Shade the rectangular area made by these lines and the horizontal line from Step 4. This shaded area represents the quota rent.
Multiply the length and the height of the shaded rectangle from the previous step to find the amount of the quota rent.
About the Author
Edriaan Koening started professionally writing in 2005 while studying toward her Bachelor of Arts in media and communications at the University of Melbourne. She has since written for several magazines and websites. Koening also holds a Master of Commerce in funds management and accounting from the University of New South Wales.