Market Regulation: Tradable Quotas and Efficiency

This lecture discusses the concept of tradable quotas in the context of market regulation, particularly focusing on coal imports. The instructor begins by presenting a problem where sectors must pay a world market price for coal while holding an import quota. The lecture covers the computation of sectors' willingness to pay (WTP) for quotas and the representation of the market for these quotas. The instructor emphasizes the inefficiency of the current quota allocation, illustrating how high-value sectors could benefit more from coal if quotas were optimally distributed. The discussion progresses to the introduction of a trading market for quotas, where sectors can buy and sell based on their willingness to pay and accept. The instructor explains how this trading mechanism can lead to a more efficient allocation of resources, maximizing total surplus. The lecture concludes with an analysis of the implications of import costs on the market for quotas, highlighting how these costs affect sectors' willingness to pay and the overall market dynamics.