import quotas and tariffs

Satisfactory Essays
Import Quotas and Tariffs

First of all I am going to explain to you what import quotas and tariffs are:
Import Quotas= Limit on the quantity of a good that can be Imported
Tariffs= Taxes on imported goods

Import quotas and tariffs are used to enable the domestic industry to enjoy higher profits in the way that they keep domestic price of a product above world levels.
Without a quota or a tariff a country will import a good when its world price is below the price that would prevail domestically were there no imports.

Now I am going to illustrate this principle: S and D are the domestic supply and demand curves. If there were no imports the domestic price and price and quantity would be P0 and Q0. At this point supply and demand are equal they are at equilibrium. But because the world price Pw is below the domestic price P0 consumers tend to purchase from abroad if imports are not restricted. So in a free market like this the domestic price P0 will fall to the world price Pw. The domestic production will fall to Qs and the domestic consumption will rise to Qd. So imports = Qd-Qs. A is the gain to the producers, A+B+C are the loss to the consumers. B+C is the deadweight loss (supply and demand are not at the equilibrium).

Now suppose the government eliminates imports by setting a quota of 0. What are the gains and the losses from such a policy ? With no imports the domestic price will rise to P0. Consumers who still purchase the good in quantity Q0 will pay more and will lose an amount of surplus given by A+B. Due to the higher price some consumers will no longer buy the good so there is an additional loss to consumer surplus. Therefore: Total change in consumer surplus= -A-B-C

Now what about the producers?
The output is now higher (Q0 instead of Qs) and is sold at a higher price (P0 instead of Pw). Therefore the producer surplus = A
The change in total surplus= CS+PS=-B-C. There is a deadweight loss – consumers lose more than producers

You May Also Find These Documents Helpful

  • Powerful Essays

    protection to domestic import-competing industries; a tariff or a quota. The choice between one or the other is likely to depend on several different concerns. One concern is the revenue effects. A tariff has an immediate advantage for governments in that it will automatically generate tariff revenue (assuming the tariff is not prohibitive). Quotas may or may not generate revenue depending on how the quota is administered. If a quota is administered by selling quota tickets (i.e., import rights) then…

    • 2534 Words
    • 11 Pages
    Powerful Essays
  • Powerful Essays

    Tariffs on Imports

    • 1696 Words
    • 7 Pages

    In simplest terms, a tariff is a tax. It adds to the cost of imported goods and is one of several trade policies that a country can enact. Tariffs are often created to protect infant industries and developing economies, but are also used by more advanced economies with developed industries. Here are five of the top reasons tariffs are used: Protecting Domestic Employment The levying of tariffs is often highly politicized. The possibility of increased competition from imported goods can threaten…

    • 1696 Words
    • 7 Pages
    Powerful Essays
  • Powerful Essays

    Import quota analysis

    • 8043 Words
    • 33 Pages

    INTRODUCTION An import quota is a limit on the quantity of a good that can be produced abroad and sold domestically. It is a type of protectionist trade restriction that sets a physical limit on the quantity of a good that can be imported into a country in a given period of time. If a quota is put on a good, less of it is imported. Quotas, like other trade restrictions, are used to benefit the producers of a good in a domestic economy at the expense of all consumers of the good in that economy. Import Quotas…

    • 8043 Words
    • 33 Pages
    Powerful Essays
  • Good Essays

    444 Cases E ot nearly a decade, the EU and the United I States were engaged in a heated trade dispute over bananas. The EU had introduced tariffs and quotas that discriminated in favor o[ bananas grown in former European colonies and dependencies located in the Caribbean and Africa. The new rules were favorable to the European-based banana companies, whose production was heavily located in these preferced regions. However, the new rules were disadvantageous to the U.S.-based companies,…

    • 725 Words
    • 3 Pages
    Good Essays
  • Better Essays

    Gelgelu 11 February 2013 The Protectionism Effect: Tariffs, Quotas, and Subsidies The most common way to protect one’s economy from import competition is to implement a tariff: a tax on imports. Generally speaking, a tariff is any tax or fee collected by a government. Sometimes the term “tariff” is used in a nontrade context, as in railroad tariffs. However, the term is much more commonly used to refer to a tax on imported goods. Tariffs have been applied by countries for centuries and have…

    • 3232 Words
    • 13 Pages
    Better Essays
  • Satisfactory Essays

    Import Policies, Tariffs and Restrictions: Kenya and Vietnam Multinational Corporate Environment Southern New Hampshire University Alexis LeGrand October 2014 Import Policies, Tariffs and Regulations: Kenya Capitol: Nairobi Major Import Suppliers $451 Million Language: English/Swahili Population: 45,010,056 24% 27% Currency: Kenyan Shilling (KES) GDP (PPP): $125.7 billion Per Capita: $2,790 92nd Largest Supplier of good imports India UAE Saudi Arabia South Africa Japan China Major Import…

    • 329 Words
    • 5 Pages
    Satisfactory Essays
  • Satisfactory Essays

    1. Who benefits from the government policies to (a) promote production of ethanol and (b) place tariff barriers on imports of sugar cane? Who suffers as a result of these policies? ANS: Benefiters in promoting production of ethanol: -Corn producers. They get subsidies from the government and get a free way of marketing from the government. The government promotes consumption of ethanol, ethanol is produced out of corn, so indirect marketing for corn farmers that will get more demand out of policies…

    • 775 Words
    • 3 Pages
    Satisfactory Essays
  • Powerful Essays

    motorcycle manufacturer, against Japanese imports. At that time, H-D was ), in …nancial distress, with merely four percent of the market it had dominated in the early 1970s. The new tari¤s were scheduled to start at 49.4% of the wholesale price and decrease to 14.4% in the …fth year, while Japanese manufacturers were allowed to ship the …rst 6000 cycles per year under the old 4.4% tari¤, an allowance that rose by 1000 units a year. After receiving temporary import relief starting in 1983, H-D came…

    • 10657 Words
    • 43 Pages
    Powerful Essays
  • Good Essays

    Tariff and Non-tariff Barriers When foreign countries can enter a home country and sell product for less than the people usually see this as a great trade opportunity. However, if that product is manufactured in the home country then the home country not only loses revenue from sales on that product but the economic impacts can run even deeper. With no need to manufacture that product companies will no longer need to purchase the raw materials or hire the employees necessary to maintain the demand…

    • 1028 Words
    • 5 Pages
    Good Essays
  • Good Essays

    Tariff and non-tariff barriers Tariff and non-tariff effect global financing operations by having an impact on whether countries will build and invest in companies in the home country. If an organization wants to build a company that imports raw material that has a tariff on it, it would make the product considerably more expensive to produce and export. Tariffs do benefit the government by increasing the revenue and also benefit home-based businesses by decreasing foreign competition. The tariff…

    • 1259 Words
    • 6 Pages
    Good Essays