Import Quotas and VERs - Online Tutor, Practice Problems & Exam Prep

Import quotas restrict the number of units that can be imported, benefiting domestic suppliers by protecting them from low world prices. For example, with a quota of 25,000 oversized lollipops, domestic prices rise from $2.50 to $4, decreasing consumer surplus while increasing producer surplus for both domestic and foreign producers. Unlike tariffs, which generate government revenue, quotas transfer surplus to foreign producers. This situation can also arise from a Voluntary Export Restraint, where exporting countries self-impose quotas, leading to similar economic outcomes and deadweight loss due to reduced trade.

Import Quotas and VERs

So we've seen how a tariff affects a market when there are imports. Now let's see another action the government can take by setting a quota on imports. An import quota will restrict the number of units that can enter. It will have a numerical limit. They will say, for example, "you can only import 1000 units of this good, and after that, we won't import anymore." We observed with the tariff that it would help domestic suppliers, but in this case, the import quota also aids domestic suppliers by protecting them from low world prices. It's easiest to see this on a graph, and in this instance, I've used numbers and been very specific in making the graph so that we can see this quota play out. We are going to see a numerical limit here. So, we've got the world price for oversized lollipops is $2.50. At the world price, domestic demand is 85,000 oversized lollipops, and domestic supply is 20,000 oversized lollipops. Then, the government sets an import quota of 25,000 units. Let's go ahead and see what happens.

First, let's label some of this on our graph. So we've got a world price of $2.50. This red line right here is going to represent our world price. Then, we've got our domestic demand of 85,000. At this world price, we're going to have domestic demand out here. Quantity demanded is going to be 85,000, and at the world price, our quantity supplied down here is 20,000. Let's put quantity supplied first. Quantity supplied is going to be 20,000. That's our original situation, and now the government comes in and sets an import quota of 25,000 units.

What's happening originally? Originally, we have free trade, and we were importing 65,000 units, the difference between the quantity demanded and the quantity supplied. But now, the government steps in and says you can only import 25,000 units. So how do we show this 25,000? What's going to happen is this line represents the 65,000 units currently being imported. We need to find a place where only 25,000 are imported, and that's going to be somewhere around here. If you notice on our graph, each of these squares is 10,000 down here. So if we've got 10,000, 20,000, 30, 40,000 right here. So this spot right here, that's going to be the quantity supplied with the quota at 40,000. Over here, this spot is going to be the quantity demanded with the quota, right in the middle of 60, 70, at 65,000. The distance between these two numbers, the quantity supplied with the quota and the quantity demanded, that difference there is our 25,000 units. So the difference between these two is going to be the 25,000 imports with a quota.

What's going to happen here is we're going to have a higher price, where the quantity supplied and quantity demanded will find their place. We've got our quantity supplied with the quota and our quantity demanded with the quota, and we see that the distance between these two is the amount of imports, as we discussed below. The imports with the quota went down to 25,000, and we've got this higher price, so in this situation, it looks like the price has gone up to $4 here with the quota. Now that we've seen what the quota does, it almost essentially looks like a tariff; we're going to see that we have a lot of similar conclusions to a tariff. The quota has essentially increased the price domestically. The world price is still $2.50, but now, because of this import quota, the domestic price here is going to be $4. We've got to see this $4 price in our market.

Let's assess consumer surplus, producer surplus, and government revenue. Consumer surplus is going to decrease since there are fewer imports. Producer surplus, both domestic and foreign, is going to increase, as domestic producers benefit from higher prices and restricted competition, while foreign producers benefit from the higher sales price of their limited exports. In terms of government revenue, unlike with tariffs, it remains zero because there is no tax imposed with quotas. A key result here is the deadweight loss created by trade inefficiency and distortion. This is the loss in consumer and producer surplus that does not transfer to any party.

An import quota leads to similar economic effects as a tariff, by restricting imports and elevating domestic prices. This affects consumer and producer surplus and causes deadweight loss, showing inefficiencies in market outcomes. The main difference between tariffs and quotas, in this case, is where the surplus from increased prices flows; with tariffs, it becomes government revenue, but with quotas, it rests with foreign producers, assuming higher transaction prices. Deciding between a tariff and a quota often hinges on political considerations and the nuances of international trade relations.

Import Quota

Alright, so I've got a big practice problem here, let's just dive right in. Suppose the USA currently both produces and imports wacky waving inflatable arm flailing tube men. The government decides to restrict international trade by imposing a quota that limits the import of wacky wavy inflatable arm flailing tube men to 4,000 units. The figure shows the results of the quota. Fill in the following table using the data in the figure. Alright. So we've got an import quota of 4,000 units, and we've got a graph here, with a bunch of information. So let's go ahead and start seeing what they're asking us here in this question. They're going to ask us a bunch of information, right, without the quota and with the quota, what changes? So let's start here with the world price. What is going to be the world price with and without the quota? So without the quota, we've got this low price, right? As we've seen, there's going to be this low price in the market and that's going to be our world price, right? That's the world price and what the quota is going to do is essentially increase that price a little bit, right? So we know that the lower of the 2 is going to be the world price. So the world price here without the quota is going to be $10. How about with the quota? Well, it's still going to be $10, right? The price everywhere else, everywhere in the world is $10. It's just in our market, in our USA market here that we're going to be affecting that price. So what are we going to see is what's going to be the USA price without the quota? Well, without the quota, we're going to see that we're at that $10, right? The USA price is going to equal the world price without the quota, but now when we add the quota, we're going to increase essentially the price is going to find its way up to here, right, because of the quota. There's going to be less imports, it's going to restrict trade a little bit, it's going to cause that price to increase. Alright? So what do we see? With the quota, the US price has gone up to $12, right? So let's go on to the next one here. It's asking us quantity supplied by US firms. Alright? So the quantity supplied by the US firms without the quota, it's going to be where that price, the world price, touches the supply curve. So here we've got our supply curve. Let me do it in a different color. And we've got this point right here, right? The world price touches the supply curve right there and we see that that's at a quantity supplied of 6,000 units, right? So that's going to be the quantity supplied without the quota. So quantity supplied without the quota is going to be 6,000 units, right? And what's going to happen with the quota? Well, when we do add the quota in, it's going to essentially get us to this higher price, the $12, right? So what are US producers going to put on the market at $12? Well, it's where it touches the supply curve, right? So the $12 touches the supply curve right there, and we're going to see that the quantity supplied with the quota, I'm going to put a q there for the quota, has gone up to 10,000. Right? And that's because there's a higher price, so they're willing to put more units out there. So 10,000 units is going to be the quantity supplied, with the quota. How about the quantity demanded by US consumers without the quota first? So without the quota just in the same way, we're going to be at that world price. Right? So without the quota, the demand curve touches the world price way out here, and we're going to see that this is going to be the quantity demanded domestically, right, without the quota. They're going to be demanding 16,000 units, And what's going to happen after the quota? Well, we're going to move to this other point, right? It's where it touches the $12 line. The demand curve touches the $12 line right there, and that's at 14,000 units. So that's the quantity demanded with the quota. Right? So we've got 14,000 units there, and what do we see in the middle of here? Right? So if we look right in between the 10,000 and the 14,000 right, the difference between these, that's the amount of the quota. It told us above that the import quota, was 4,000 units, right. It told us that, the government's going to set a quota of 4,000 units and that's exactly what we see here, right? That's the distance between the quantity demanded and quantity supplied with the quota. So let's go ahead and see the quantity imported. So quantity imported without the quota, right, that's going to be the difference between the quantity demanded and quantity supplied without the quota. So what was our quantity demanded and quantity supplied without the quota? Well, it was this 16,000, was the quantity demanded, right, minus the quantity supplied was 6,000. So the difference there of 10,000 is going to be the amount of imports when we didn't have a quota. Alright. So that's going to be 10,000 units being imported without the quota and that makes sense. Right? If we look at without the quota, the quantity supplied without the quota by US firms right here and the quantity demanded right here of 16,000, well that 10,000 is going to fill the gap of the two numbers, right, And that's going to be the imports. So let's look at imports with the quota and just like we said, there's a quota of 4,000, right? And that's what we see is the difference between the coin demanded and quantity supplied with the quota. 14,000 minus 10,000. That's going to give us that quantity imported which is equal to our import quota of 4,000 units and again, you can see here that the difference between the quantity supplied by US firms and by US consumers is equal to that quota. Right? That 4,000 fills that gap. Alright, cool. So let's go on to the next one and talk about the area of consumer surplus. So what was the area of consumer surplus without the quota? So without the quota, it's everything above the price, right, which the price was $10 in that situation, but below the demand curve, and that's going to give us this big triangle here that includes everything a, b, c, d, e, and F. Right. It includes all of those regions. So our consumer surplus without the quota, I'm going to say area of a plus b plus c plus d plus e plus f. Right? They have all of those sections. Now what about without the quota or excuse me, with the quota? So I'm going to erase all that. With the quota, we've got this higher price. Right? So we're going to see that consumer surplus is everything above that price of 12, but under the demand curve, and we're going to get this big region right here, a plus b. Right? So they've lost that section cdef and all that's left is that a plus b. So the consumer surplus has decreased, right, and that's what we expect with an import quota, and we've got a consumer surplus of a+b. How about the domestic producer surplus? So we're talking only about the domestic producers and before, before the quota, right, right, without the quota, what was their surplus? Their surplus was just this section g, right, because it's everything below the price but above the supply curve. It was just g without_the_quota. Alright? And what about with the quota? Well, now we've got a higher price, right? So they're able to capture a little more surplus. So it's still going to have g but it's going to include this section C as well, right? Because that's under the price and above the supply curve. Cool. So that area right there is going to be c+g. Right? So they've gotten that extra bit of surplus because of the higher price.

Here’s what students ask on this topic:

What is an import quota and how does it affect domestic markets?

An import quota is a government-imposed limit on the number of units of a particular good that can be imported into a country. By restricting the supply of foreign goods, import quotas help protect domestic suppliers from low world prices. This leads to an increase in the domestic price of the good. For example, if the world price of oversized lollipops is $2.50 and a quota of 25,000 units is set, the domestic price may rise to $4. This results in a decrease in consumer surplus, as consumers pay higher prices, and an increase in producer surplus for both domestic and foreign producers who can sell at the higher price.

How do import quotas differ from tariffs in terms of economic impact?

Both import quotas and tariffs restrict imports and raise domestic prices, but they differ in who benefits from the increased prices. Tariffs generate government revenue by imposing a tax on imported goods, which is collected by the government. In contrast, import quotas do not generate government revenue. Instead, the surplus created by the higher domestic prices goes to foreign producers who can sell their limited imports at the higher price. This means that while both policies protect domestic industries, tariffs provide additional revenue to the government, whereas quotas benefit foreign producers.

What is a Voluntary Export Restraint (VER) and how does it compare to an import quota?

A Voluntary Export Restraint (VER) is an agreement between exporting and importing countries where the exporting country agrees to limit the quantity of goods exported to the importing country. Economically, a VER has similar effects to an import quota. Both policies restrict the supply of goods, leading to higher domestic prices, decreased consumer surplus, and increased producer surplus for both domestic and foreign producers. The key difference is that a VER is self-imposed by the exporting country, often as a result of diplomatic negotiations, whereas an import quota is imposed by the importing country's government.

Why might a government choose to implement an import quota instead of a tariff?

A government might choose to implement an import quota instead of a tariff for political reasons. While tariffs generate revenue for the government, they can strain international relations as they are seen as more aggressive trade barriers. Import quotas, on the other hand, allow foreign producers to benefit from higher prices in the domestic market, which can make them more palatable to exporting countries. This can help maintain better diplomatic and trade relationships. Additionally, quotas can be used to provide more predictable and controlled levels of imports compared to tariffs.

What are the effects of import quotas on consumer and producer surplus?

Import quotas decrease consumer surplus and increase producer surplus. By limiting the number of imported goods, quotas raise the domestic price of the good. Consumers face higher prices and reduced availability, leading to a loss in consumer surplus. For example, if the price of oversized lollipops rises from $2.50 to $4 due to a quota, consumers lose the surplus they previously enjoyed at the lower price. On the other hand, domestic producers benefit from the higher prices, increasing their producer surplus. Foreign producers also gain surplus as they can sell their limited imports at the higher domestic price.