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What happened to the producer surplus and the consumer surplus of a market when there is...

What happened to the producer surplus and the consumer surplus of a market when there is a quota limit? I wonder where does the quota rent square go to, consumer surplus or producer surplus?

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Answer #1

The domestic government receive the tariff revenue. The quota rent does not add to the consumer surplus, producer surplus. Since the government has put quota limit this will increase the price of the exported goods. This gives rise to quota rent. The government is having a number of options to transfer the quota rent. They auction it and transfer it to sellers who can buy the quota rent at the world price and sell at domestic price.

There can be rent seeking that is the government can transfer the quota to the foreign companies against the rent that they receive.

Therefore the government holds the quota rent.

Please contact if having any query will be obliged to you for your generous support. Your help mean alot to me please help. Thank you

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