Final answer:
A production quota raises the price and decreases the marginal social cost of production, ensuring that the price is set equal to the marginal cost, as with a perfectly competitive market.
Step-by-step explanation:
The student's question pertains to the effects of a production quota on the economy. A production quota is a limit set by the government on the amount of a product that can be produced. This often comes into play when regulators aim to control the market for the greater social interest. For example, regulators might set a point along the market demand curve that ensures the firm produces output where the marginal cost (MC) intersects the demand curve, ensuring the price equals the marginal cost, which is characteristic of a perfectly competitive market.
However, if a production quota were set above the allocatively efficient choice where P = MC, the marginal social cost of production would increase because the additional cost of producing more units is higher than what society values them. This is a less desirable scenario as it can lead to overproduction and result in inefficiencies where the cost overshadows the societal benefits. Therefore, option D is correct: a production quota raises the price and decreases the marginal social cost of production.