Introduction
Tour Itinerary
Destinations
Lusaka Stn.
COMESA
Central Bank
Issues
Theories
Benefits of Trade
Advantages
Trde Creation
Trading Blocs
Terms of Trade
Balance of Payts:
Introduction
Interpreting
Exchange Rates:
Introduction
Fixed
Floating
Effects
Marshall-Lerner
Devaluation
Protection:
Quotas
Tariffs
Surplus
Elasticity
Worksheets
Resources

Home Field Trips Trade Tour The Imposition of Quotas

Theories

The Imposition of Quotas

Next theory - The Imposition of Tariffs and Welfare Loss >>

A quota is a physical limit imposed upon the amount of a good that may be imported. This will have the effect of restricting the total supply to the domestic market.

In a situation where there is free trade and no barriers to trade are imposed then at the world price of Pw domestic producers will supply Q1 and Q1-Q2 will be imported. The supply curve to the domestic market will be Abd1.

The effect of imposing a quota will be to limit the amount of imported goods. Let us suppose the quota cuts imports from Q1-Q2 to Q1-Q3. A new supply curve can now be drawn incorporating the amount of the quota, BC, and the amount that domestic producers supply, AB ( at prices below Pw) and Cd2 (at prices above Pw).

The world price Sw no longer acts as the relevant supply curve. The effect of the quota will raise the market price to Pq. This will reduce the benefit to consumers causing a loss of consumer surplus. With a tariff the effect was to increase government tax revenue. However, in this case instead of the government earning tax revenue the benefit goes to the importer or the foreign exporter. Although the amount imported falls, the price and hence the revenue, may, depending upon the price elasticity of demand for imports, increase.

The advantage of the quota is that its effect will be more definite than a tariff. With a tariff the impact of the tariff on the quantity imported will depend upon the price elasticity of demand of imports however with a quota the country applying the quota will determine the precise amount.

A voluntary export restraint or VER operates like a quota except it is the exporting nation that sets a limit on the amount that they will export. By agreeing on a VER the exporting country may prevent other more rigorous forms of protectionism being applied. The Uruguay round of negotiations agreed to phase out VERs.

Next theory - The Imposition of Tariffs and Welfare Loss >>

Related Glossary Items:
Price Elasticity of Demand
Voluntary Export Restraints
Quotas
Protectionism
Tariff
Consumer Surplus

Related Issues:
Uruguay Round
Protectionist Policies of Zambia
Zambia's Exports and Imports
Zambia's Balance of Payments Situation

Related Theories:
The Imposition of Tariffs and Welfare Loss
Consumer and Producer Surplus
Price Elasticity of Demand