A production quota is a limit set by the government on how much of a specific product a producer is allowed to make in a certain time. By directly limiting the total amount produced, this often creates artificial scarcity, which can cause market prices to rise above the normal equilibrium level.

Key points:

• Can be set above or below the standard market quantity, depending on government goals.
• Often creates deadweight loss, which means the total economic benefit to society decreases.
• Leads to quota rents, which are extra profits for producers who hold the legal right to produce the goods.
• Frequently used in farming to help increase or protect the income of local farmers.