Tradable Quotas: Market Dynamics and Efficiency

This lecture discusses the concept of tradable quotas within the context of Zelandia's coal importation. The instructor outlines the scenario where 11 sectors of the economy each require one million tons of coal, with the government rationing imports to five million tons. The willingness to pay (WTP) for coal varies among sectors, leading to a random allocation of quotas. The instructor explains how to draw the demand curve for coal and compute the total benefits for sectors granted quotas. The lecture emphasizes the importance of facilitating the trade of quotas to enhance market efficiency. The instructor illustrates the supply and demand dynamics in the quota market, highlighting how potential buyers and sellers interact. The equilibrium price for quotas is determined, demonstrating how market forces can lead to efficient allocation. The impact of an external price for coal on the willingness to pay for quotas is also analyzed, showing how it affects market behavior and trading outcomes. Overall, the lecture provides a comprehensive overview of tradable quotas and their implications for resource allocation.