Economists value quota rent, or quota wedge, calculations because they help economists understand the effect of tariffs, import restrictions and other actions that change the cost of particular goods to the consumer. The actual calculation of the quota rent is simple. The data needed to make the calculation are substantial, however, and require some understanding of the economic context. Sometimes the existence of a quota rent is obvious; at other times, the first task when undertaking a quota rent calculation is determining if it exists and, if so, how.
Determining Presence of Quota Rent
Determine if the present cost of particular goods includes a quota rent. What economists mean by a "rent" is the extra profit a company may extract from a customer because of an agreement that favors the company or for some other reason, such as a lack of competition that gives the company an added advantage.
A quota rent is a regulatory restriction on the allowed amount of some good or service that may enter or leave an economic sphere. Often it is intended to produce an economic advantage for one of the parties. For example, the difference between the cost of an auto part in the Chinese domestic market and the actual cost may be the result of an import quota that restricts the supply and allows domestic Chinese manufacturers to charge more than they could in a fully competitive economy. Not all quota rents are straightforward. Some are hidden or indirect, and others are inadvertent.
Detecting Indirect Quota Rent
Determine if the goods are affected by an indirect or inadvertent quota rent. While a strict regulatory environment, for instance, protects consumers, it may end up giving the largest corporations a competitive advantage. For example, if the regulations require companies to invest large amounts of capital to begin a wind farm or nuclear power plant, this restricts the number of companies who can engage in nuclear or alternative energy production, limiting competition.
A city may regulate taxis to ensure quality of service, but taxi regulation may limit the number of available taxis on city streets. The unintended result is that one group —owners with medallions — enjoy a competitive advantage over "gypsy" cab operators.
Uncovering Hidden Quota Rent
Determine if there is a hidden quota rent. In 2014, Eduardo Porter, an economist writing for The New York Times, discussed the proposed mergers of AT&T with Direct TV and of Comcast with Time Warner Cable. The corporations claimed that the proposed mergers aim to lower cable fees by reducing operating costs. But Porter concluded that the concentration of very large communication corporations that control a majority of markets creates a quota rent because many customers have few competitive sources to turn to.
Calculating the Quota Rent
The actual quota rent calculation is simple: The cost of a product or service in an economic environment with a quota rent minus its cost in a free market equals the quota rent. Obtaining the data necessary to calculate the difference, however, requires the substantial resources available to Congress and large international organizations, such as the International Monetary Fund and the European Economic Council.
Determining the quota rent amount will always be subjective. If the current environment has a quota rent, the cost of the product in the free market may only be imputed. A corporate chieftain may propose that it is "x"; a consumer advocacy institution may propose it is twice that.
Patrick Gleeson received a doctorate in 18th century English literature at the University of Washington. He served as a professor of English at the University of Victoria and was head of freshman English at San Francisco State University. Gleeson is the director of technical publications for McClarie Group and manages an investment fund. He is a Registered Investment Advisor.