About the Efficiency of Input vs. Output Quotas

Output quotas are known to be more efficient than input quotas in transferring surplus from consumers to producers. Input quotas, by distorting the shadow prices of inputs, lead to inefficient production and generate larger deadweight losses, for a given amount of surplus transferred. Yet, input quotas have been a ubiquitous tool in agricultural policy. Practicality considerations, as well as the difficulty to control outputs that heavily depend on stochastic weather conditions, are arguments that help understand why policy makers may favor input quotas over output quotas. In this paper, we offer an additional explanation that rests on efficiency considerations. Assuming that the regulator only has limited knowledge about the market fundamentals (supply and demand elasticities, among others), seeks to transfer at least a given amount of surplus to producers and is influenced by the industry in his choice of the quota level, we show that an input quota becomes the optimal policy.