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You are expected to evaluate/examine (AO3) quotas and their effects on markets and stakeholders (SL+HL), draw (AO4) the effect of quotas on price, production, consumption, and welfare (SL+HL), and calculate (AO4) the financial effect of quotas (HL)
Quotas (AO3, AO4)
Quotas (AO3, AO4)
While tariffs are the most common form of trade protection, other measures also exist. This includes quotas.
Quotas are quantitative limits on imports of a good or service into a country.
Before the quota:
Domestic producers were willing and able to supply Q1
Consumers were demanding Q4
Hence, imports were Q1 <-> Q4
And the price was P1, or World Price
After the quota:
Imports are restricted to a certain amount, Q1 <-> Q2
Hence, domestic producers have to produce the rest of the demand (Q2 <-> Q4), so they can ask for equilibrium prices
This equilibrium meets at (Q3, P2)
Domestic producers now produce Q3 (from Q1)
Consumers now demand Q3 (from Q4)
Foreign producers are only allowed to export Q1 <-> Q2
Effect of Quotas on Markets and Stakeholders (AO3, AO4)
Effect of Quotas on Markets and Stakeholders (AO3, AO4)
Effect on Consumers
Surplus is lost as prices increase
Since the amount of imports decrease, there is less choice for consumers
Effect on Producers
Surplus is gained for domestic producers as prices and quantity demanded increase
In the long run, other governments may do similar things in response, which will negatively affect these producers
Foreign producers will be able to sell less products, but at a higher price. Hence, the change in revenue will depend on the PED of the product
Effect on the Market (Consumers+Producers)
The gained surplus for producers is smaller than the lost surplus for consumers
Hence, quotas make markets less efficient, as they reduce the social/community surplus (welfare loss)
Effect on the Government
There is no visible effect in revenue on the government
However, the government will in many cases sell import licenses in markets with quotas, earning itself some revenue
The government will also have to spend extra money as it has to administrate this quota (prevent smuggling, etc.)
Calculating the Effect of Quotas (HL Only) (AO4)
Calculating the Effect of Quotas (HL Only) (AO4)
This is very similar to calculating the changes in surplus and revenue for tariffs (just areas of triangles and rectangles)
Consumer Surplus and Expenditure (use arrows to see changes)
Domestic Producer Surplus and Revenue (use arrows to see changes)
Foreign Producer Revenue (use arrows to see changes)
With quotas, we can also see the revenue of foreign producers (because we can know exactly how much they will sell). However, their surplus is unknown (we can't deduce it from this graph alone).
Welfare Loss
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