Final answer:
A production quota restricts supply, increasing market price and decreasing output. A subsidy reduces costs, leading to lower prices and increased output. The efficiency of these interventions depends on various factors.
Step-by-step explanation:
In a market, a production quota is a limit set by the government on the quantity of a good that can be produced. It is usually set below the equilibrium quantity, resulting in a decrease in market output. On the other hand, a subsidy is a payment made by the government to producers, which reduces their costs of production. This increase in producer benefits can lead to an increase in market output.
When a production quota is implemented, it restricts the supply of goods in the market. As a result, the market price tends to increase, and the market output decreases. This is because producers are limited in their production capacity and are not able to meet the full demand of consumers. On the other hand, when a subsidy is provided, it reduces the cost of production for producers. This leads to a decrease in the price of the subsidized goods and an increase in market output. The subsidy incentivizes producers to increase their production because they can sell their goods at a lower price without suffering losses.
Whether these forms of intervention are efficient or not depends on various factors. Production quotas can lead to inefficiencies in the market by restricting competition and limiting consumer choice. Subsidies, on the other hand, can have positive effects by reducing costs and increasing output, but they can also lead to inefficiencies by distorting market prices and potentially causing overproduction. It is important for policymakers to carefully consider the impacts and trade-offs of these interventions before implementing them.