Import Quota Analysis

Question 1

What is a Quota?

Answer 1

• Quantiative (volume) limits on the level of imports allowed or a limit to the value of imports permitted into a country in a given time period (usually one year)

Question 2

Draw an Import Quota diagram

Answer 2

Question 3

Sumamry of welfare effects of an import quota

Answer 3

• Ø The restriction on imports leads to excess demand at the prevailing price (determined by world supply). This shortage leads to a rise in price, until the difference between quantity demanded and quantity supplied domestically is equal to the size of the import quota.
• Ø Consumers are worse off. Consumers buy fewer units and the increase in the domestic price of both imported goods and the domestic substitutes reduces consumer surplus in the market.
• Ø Domestic producers better off. The increase in the price of their product increases producer surplus in the industry. The price increase also induces an increase in the output of existing firms (and perhaps the addition of new firms) via incentive function, an increase in employment etc.
  Ø Overall welfare loss results. However, the size of the deadweight loss depends on how the government administers the quotas.
• ○ If the government auctions off the quotas, this revenue means that the overall deadweight loss is equivalent to that of the tariff.
• ○ If instead the government gives the quota rights away to foreigners, then foreigners will receive the quota rents and thus the overall welfare loss is greater than with a tariff.

Question 4

Sumamry of welfare effects of an import quota

Answer 4

• The restriction on imports leads to excess demand at the prevailing price (determined by world supply). This shortage leads to a rise in price, until the difference between quantity demanded and quantity supplied domestically is equal to the size of the import quota.
• Consumers are worse off. Consumers buy fewer units and the increase in the domestic price of both imported goods and the domestic substitutes reduces consumer surplus in the market.
• Domestic producers better off. The increase in the price of their product increases producer surplus in the industry. The price increase also induces an increase in the output of existing firms (and perhaps the addition of new firms) via incentive function, an increase in employment etc.
  Overall welfare loss results. However, the size of the deadweight loss depends on how the government administers the quotas.
• ○ If the government auctions off the quotas, this revenue means that the overall deadweight loss is equivalent to that of the tariff.
• ○ If instead the government gives the quota rights away to foreigners, then foreigners will receive the quota rents and thus the overall welfare loss is greater than with a tariff.