Question

Suppose that the government imposes quota of 70% of the current import amount . Do the following:

a. Plot a graph to show the effects of the quota.

b. Show the new areas of consumer surplus, producer surplus, and any other relevant areas.

c. Show the deadweight losses due to the quota.

d. Who wins and who loses from the quota?

Answer 1

a.

Below graph shows the effect of Quota. The supply curve increases from SS to SS + Quota

Initial World Price is at Pw.

b.

Before Quota, Consumer Surplus = Area 1 + 2 + 3 + 4 + 5 + 6

After Quota, Consumer Surplus = Area5 + 6

Loss in consumer surplus = Area 1 + 2 + 3 + 4

Before Quota, Producer Surplus = Area 7

After Quota, Producer Surplus = Area 1 + 7

Increase in producer surplus by Area 1

c.

Deadweight Loss = Area 3 + 4

d.

Domestic producers are better-off and domestic consumers are worse-off with the import quota. Foreigh producers, on other hand, lose revenue due to fall in their income. Governemnt's welfare is remain unchanged.