To illustrate the effects of a production quota, we’ll use the example of the market for dairy products in California. Markets in milk, both liquid and powder, cheese, and other dairy products are regulated by the California Department of Food and Agriculture. A production quota for the market is set and allocations are made to each producer that sum to the market quota.

Figure 7.9 illustrates this market. The demand curve, D, tells us the quantity demanded at each price and the supply curve, S, tells us the quantity supplied at each price.

