Uncertainty and Production Quotas

Robert Fraser

The Economic Record, 1986, vol. 62, issue 3, 338-342

Abstract: This paper examines the role of uncertainty in determining the impact of production quotas on a risk‐neutral producer's behaviour In the context of production uncertainty the introduction of a quota will lead to a reduction in planned production. Moreover, in a situation of an established quota, the level of planned production relative to the quota depends both on the size of the profit margin on quota production and on the extent of production uncertainty. Apart from these direct influences, uncertainty influences planned production indirectly in a situation where over‐quota production can be sold in an uncertain export market. The direction of this influence depends on the relationship between the producer's uncertainties of price and production. It is argued, therefore, that the welfare assessment of the impact of production quotas must incorporate the role of uncertainty.

Date: 1986
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