Question

1. The government is considering imposing an import quota on a product that is also produced domestically. Demonstrate that the quota would have different effects on domestic consumers and producers. Use one or more diagrams to illustrate your answer.

Answer 1

An import quota is a limit on the amount of imports that can be brought into a particular country. Quotas will reduce imports, and help domestic suppliers. However, they will lead to higher prices for consumers, a decline in economic welfare and could lead to retaliation with other countries placing tariffs on our exports.

Imposing Quotas have different effects on domestic consumers and producers.

Quotas will have an adverse effect on the domestic consumers, this is because due to imposition of quota, the supply of imported good will decrease and hence its price may rise and hence the consumers will have to pay a higher price. It can be seen from the figure that total quantity falls from Q4 to Q3 and hence price rises from P2 to P3. So there is loss to consumers.

Imposing quotas will be beneficial for the domestic suppliers because with rise in price of the product they can supply more product to the market, hence domestic supply increases from Q1 to Q2 and hence there profit also increases.

There is a net welfare loss to society because the increase in producer surplus is outweighed by the decline in consumer surplus.

All these effects on consumers and producers can be seen from the following graph -

T Supply (domedic) supply (domestic tquota) welfare P. Loss / P3 /Supply (before (quota) quoda) lew R (World) Demand Q2 az கிய Quantity