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What happens to social surplus in the iPhone market described there if the quantity of iPhones...

What happens to social surplus in the iPhone market described there if the quantity of iPhones sold in the market is restricted to 2 iPhones? Why does this happen?

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Answer #1

When quantity of iPhones sold is restricted to 2 units, then there will be a shortage of iPhones. Hence, price will rise much higher than it's equilibrium quantity, as shown in the diagram.

Consumer will pay a price of Pb.

Quota rent will either accrue to government of the license holders who can be sellers as well.

Total social surplus = consumer surplus+ qouta rent + producer surplus.

With a quota restriction, the market will witness a fall in total social surplus and give rise to Dead weight loss. Dead weight loss is loss of surplus/welfare arising from market inefficiency which in this case is a quota/restriction.

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