3. With the production quota, the market is not efficient because at the quantity produced, the marginal benefit

(on the demand curve) exceeds the marginal cost (on the supply curve). The deadweight loss equals $5 billion, of which $4 billion is a decrease in consumer surplus and $1 billion is a decrease in producer surplus. But another $2 billion of consumer surplus is transferred to producers, so consumer surplus decreases by $6 billion. Consumers lose. The change in producer surplus is an increase of $1 billion. Farmers gain. The outcome is unfair on both views of fairness unless farmers are poorer than consumers, in which case it might be fair to boost farmers’ incomes.

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Solution to In the News