Question

Consider a situation of a country that imports Commodity O. Initially, the country has a (binding) quota on Commodity O. It then changes its policy and gets rid of the quota and allows trade at the world price. Answer the following assuming there is/was no foreign retaliation.

(a) What happens to the price of O in the country?

(b) What happens to the amount of domestic production of O in the country?

The amount of domestic consumption of O in the country?

(c) Domestically, who gains from this change in policy? Why?

(d) Domestically, who loses from this change in policy? Why

Answer 1

a) As the nation has removed the import quota it will lead to a higher import at the world price and the price of the commodity O will decrease in the domestic nation.

b) At a lower price the domestic production will decrease. The local producer who are efficient enough to produce at the world price will only produce other will be out of the business. As the price decease the domestic consumption of O will increase.

c) The consumer who are consuming more have gained more from this policy as it will result in a higher consumer surplus in the market.

d) The producer who cannot compete at the world price will be loosing due to this policy as they are out of business due to a decrease in the price.