ECONOMIC HYSTERESIS AND THE EFFECTS OF OUTPUT REGULATION

Economic hysteresis, the continuation of a phenomenon after its initia l cause has disappeared, represents an alternative theoretical explana tion for the fixed-asset problem. When a set of fixed assets includes quota licenses, hysteresis in license investment leads to distortions that have not been measured in the policy analysis literature. A model of economic ''friction'' tests the effect of hysteresis in Alberta da iry investment. Estimates of investment functions show that desired in vestment (disinvestment) must be significantly greater (less) than zer o before any action is taken. Because cattle and quota are often purch ased together, the relatively long periods of no change in quota holdi ngs that result from hysteresis cause similar periods in which herds n either grow nor contract.