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.

The Not-So-Simple Economics of Production Quota Buyouts

“…An excise tax–funded buyout is depicted in Figure 1b, where S * is supply and D t is total demand (some parts of this section have been adapted from Schmitz, Schmitz, and Haynes [2012] and Schmitz, Haynes, and Schmitz [2013a, 2013b]). Under a quota arrangement, price is p ** and quantity is q **.…”

Benefit-cost analysis: government compensation vs. consumer tax model

“…They also assess empirically how, in the peanut buyout case, the government, producers, and consumers are affected by both the introduction and removal of production quotas. Additionally, the work of Schmitz et al (2012) determined the economic impact on producers and consumers when the consumer tax compensation method is employed (i.e., the case in the US Tobacco Quota Buyout).…”

The U.S. Tobacco Buyout: A Partial and General Equilibrium Analysis

“…After that period, the net gain to producers falls because prices are no longer supported. The net effect of the buyout on quota owners and consumers from a consumption tax is zero until the competitive equilibrium is restored (Schmitz, Schmitz, and Haynes, 2012).…”