Up to this point in our analysis, we have examined the impact of price ceilings, subsidies, and taxes on society's happiness. But a lot of government interventions belong to two additional categories: QUOTAS and MANDATES. Quotas are government-imposed restrictions on the amount of output a firm can produce. Mandates are government rules which require firms to produce more of something--like workplace safety. Quotas and mandates are easily incorporated into our Profit Table once we see their connection to taxes and subsidies respectively.

Consider peanut quotas. What is the primary impact of peanut quotas on the allocation of society's resources? You don't have to be a rocket scientist (or peanut farmer, for that matter) to realize that the primary impact of a peanut quota is to divert resources out of the peanut industry into other activities. There will be fewer peanuts grown under a quota system. Fewer peanuts means fewer peanut farmers, less farmland, fewer automated peanut-picking machines, etc., that will be directed to the peanut industry. We want to use our Profit Table to illustrate how a resource transfer that would have been profitable before the peanut quota now becomes unprofitable.

Why is it now unprofitable to harvest peanuts beyond the quota? What happens to the peanut farmer if he goes beyond his quota? Actually, we have no idea. We confess that we are woefully ignorant of the peanut industry, just as we were woefully ignorant of the shipping industry. On the other hand, reason suggests that there are only a few possibilities. The most obvious possibility is that the peanut farmer would have to pay a hefty fine if caught. Alternatively, he could lose his quota allotment entirely and have to find alternative employment. (Maybe he could join the merchant marines.) Another possibility is that he is thrown in jail. (If he tries to escape, he could be shot. Headline news story: "QUOTAS RESULT IN DEATH OF GOOBER FARMER.")

For our purposes, it really doesn't matter which of these possibilities is the right one. The main point is that there is a PENALTY for exceeding the quota, and that this penalty is large enough to discourage some farmers from growing additional peanuts. Consider the following representation of the farmer's decision to grow another 1000 pounds of peanuts.

At 70 cents a pound, this farmer calculates that he could earn $700 in revenues by growing 1000 more pounds of peanuts. The costs to growing these additional peanuts are $450 (in extra land, labor, fertilizer, etc.), so the farmer decides to grow the peanuts.

Enter the Department of Agriculture. Since these peanuts would put the farmer over his peanut quota, he now needs to consider the full economic transaction. While he'll make $250 in profit, he will also incur a $5000 penalty for violating the United States' government policy on peanut production. Note that this penalty enters our Profit Table in precisely the same way as a tax. It represents the monetary value of the hurt that the farmer will experience once the feds catch him.

Once the farmer considers this penalty, those extra peanuts lose their luster. The farmer chooses not to grow additional peanuts. An economic transaction that would have increased society's happiness by $250 has been discouraged. Resources are transferred to lesser valued activities instead of the higher valued use of peanut production. Society is made a little poorer. And that is a shame.²

Of course, this numerical example illustrates the loss associated with not producing an additional thousand pounds of peanuts. How large is the total loss associated with the quota? It is close to impossible to be able to answer this question. Among other things, one would have to know how many peanuts would have been grown in the absence of the quota. That is, one would have to look into their crystal ball and see a world that doesn't exist--a world without peanut quotas. Even though we can't be certain how large the total loss will be, we can be certain of one thing. Production restrictions--quotas--reduce society's happiness by causing too few resources to flow to an industry where the government has intervened. Our next task is to examine the impact of government mandates that cause too many resources to be devoted to a particular good.