Jim Whitney Economics 311

  Trade policy analysis 2: Quotas

 

Example: The U.S. market for dairy products (Q=billion pounds)
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A. Free trade: The diagram above illustrates the U.S. free-trade situation.
B. Quota: import quantity gets limited to a maximum of 2 (billion pounds).
B1: Price and quantity effects
        Step 1: In the diagram, draw the curve S+quota, the U.S. supply curve + the size of the quantitative restriction.
        Step 2: Label the new equilibrium price and quantities with the quantitative restriction.
        Step 3: Complete Table 1.
Table 1
Situation in the U.S.: Free trade Quota
Price    
Quantity produced    
Quantity consumed    
Quantity imported    
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B2. National welfare effects
        Step 1: In the diagram, indicate the change in consumer surplus (\\\), producer surplus (///), and the available quota rents/profits (|||).
        Step 2: Complete Table 2.
Table 2: Quota consequences versus free trade
  Quota
  Area in graph Amount
Change in consumer surplus    
Change in producer surplus    
Domestic quota rents    
Change in national welfare