ABSTRACT

Basically the three comments published above are improvements or extensions on our basic paper. We have only rather minor objections to them. The note by Robert Main and Charles Baird points out an error in our original exposition. We regret the error (which was first pointed out to us in private correspondence by Yew-Kwang Ng of Monash University, Australia) and are happy that it has no disastrous consequences for our basic argument. The other two comments, by Philip Coelho and by Gary Yohe, introduce institutional structures different from the ones which we discussed. This is no criticism; it is clearly desirable that many different institutional structures be examined. The Coelho comment considers a situation where once production quotas have been issued, they are freely purchased and sold. In a framework of analysis wholly consistent with Coelho’s, the outcome derived from his process seems to represent transitional rather than a final equilibrium. With full divisibility of quotas, and with no transactions costs, smaller firms operating at their minimum average cost levels of production could purchase quotas at a higher price than his oversize firms. The real problem here, however, is the degree to which such quotas are salable and the administrative restrictions put upon transfer by the government agency administering the quota scheme. We return to this question below.