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 gain....
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