There is a great deal of debate around the world today about using carbon credits to reduce global climate change, or fishing quotas to enhance or protect global fish populations. In light of the debate, consider a competitive industry comprising N heterogeneous firms, (i.e., firms that do not have identical cost functions). Suppose the initial equilibrium output of this industry is Xo. Now suppose that a quota system is introduced. Each of the existing firms in the industry is given a total of Xo/N quota coupons, with each coupon granting the right to produce one unit of output.
a. If the quota coupons are not transferable, what impact will the quota system have on the price and output of this good? Explain carefully. Now assume that the quota coupons are fully transferable (tradeable) in any quantity.
b. What will be the impact of this quota scheme on the price and output of the good in question? Explain fully.
c. What will be the equilibrium price of a quota coupon? Explain fully.