Protectionist Policies: Quotas & Export Subsidies

Question 1

what is a quota

Answer 1

A quota is a physical limit on imports
This limit is usually set below the free market level of imports
As cheaper imports are limited, a quota raises the market price
As cheaper imports are limited, a quota may create shortages

Some domestic firms benefit as they are able to supply more due to the lower level of imports
This may increase the level of employment for domestic firms

Question 2

how does an export subsidy work?

Answer 2

An export subsidy lowers the cost of production for domestic firms
They can increase output and lower prices
With lower prices, their goods and services are more competitive internationally
If firms are able to meet all of the domestic demand then the excess supply may be exported
The increased output may result in increased domestic employment

The export subsidy can be given to the firm by the government using any of the following methods:
Direct subsidy payments
Tax relief which can be substantial
The provision of cheap credit or interest-free government loans