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Hint
Import Quotas

A quota is a limit placed on the amount of imports to or exports from a country. Limits on
imports are more common than limits on exports so we focus our analysis on an import
quota.

Consider a small country with a high autarky price for steel. The government wants
consumers to be able to buy cheaper steel from abroad, but it doesnt want the price of
steel to fall too low and hurt major campaign donors in the steel industry. A compromise
would be to allow a limited number of imports with an import quota. The graph below
shows how the import quota would affect the domestic market for steel.


tic

P
om

es

($ / ton)

Domestic
+ Import S

A
B
P*

PW

H
D
F

QS

QS

QD

QD

Figure 1: Import Quotas effect on P and Q

Q (tons)

Under free trade, the price would be the world price, Pw, with domestic consumers buying
"# and domestic producers supplying a paltry $# .




1

With a quota domestic citizens can only import a limited amount of steel. Lets think about
what the supply looks like with the quota. For each price below the world price, the only
source of supply is the domestically produced steel. But if the price of steel in this country
is at or above the world price, foreign producers will be willing supply imports until they
hit the quota. The supply curve is equal to the domestic supply plus the quota amount.
Graphically, the supply curve is just the domestic supply for > ' and then for ' is
shifted to the right by exactly the amount of the quota.

As a result, the equilibrium in the market for steel after the quota is imposed has the
following features: compared to the free trade equilibrium, the price rises, the domestic
quantity of steel demanded falls to ") , and the domestic quantity of steel supplied rises to
")

We can summarize the welfare effects of imposing a quota by using a welfare table.

CS
Domestic PS
Quota Rents
Social Surplus

Free Trade
A+B+C+D+E+F+G
H
n/a
A+B+C+D+E+F+G+H

Import Quota
A+B
C+H
E+F
A+B+C+E+F+H

Change
-(C+D+E+F+G)
C
E+F
-(D+G)

The table looks almost identical to the tariff case. As with the tariff there are two sources of
DWL. First, domestic producers waste resources producing extra steel that the country
could have imported for less than it cost to make. This give us the DWL from area D.
Second, the quota limits the amount of steel that is consumed, even though consumers are
willing to pay more than it costs to acquire the steel. This gives us area F as DWL. Notice
how, like the tariff, a quota results in DWL both from too much produced and too little
consumed.

Is there any difference between the effects of a quota and a tariff? Yes! A tariff is a tax so it
raises revenue for the government. A quota does not raise any revenue and instead lets the
foreign producers collect the would-be tax revenue as a quota rent.