Import Quotas and VERs - Online Tutor, Practice Problems & Exam Prep

An import quota restricts the number of units that can be imported, benefiting domestic suppliers by protecting them from low world prices. For example, with a quota of 25,000 oversized lollipops, domestic prices rise from $2.50 to $4, reducing consumer surplus while increasing domestic and foreign producer surplus. Unlike tariffs, quotas do not generate government revenue; instead, foreign producers gain from selling at higher prices. This political tool can also manifest as a Voluntary Export Restraint, where exporting countries limit their own exports, yielding similar economic effects.

Import Quotas and VERs

So we've seen how a tariff has effects on a market when there are imports. Now let's see another thing the government can do by setting a quota on imports. An import quota is going to restrict the number of units that can come in. It's going to have a numerical limit, right? They're going to say, "Hey, you can only import 1000 units of this good, and after that, we're not going to import anymore," right? They're going to set a numerical limit like that. So we saw with the tariff, right, the tariff was going to help the domestic suppliers, but in this case, the import quota also helps the domestic suppliers, right? By defending them against these low world prices. Alright, so again it's going to be easiest to see this on a graph, and in this case, I've used numbers, and I've been very specific in making the graph so that we can see this quota play out, right? We're going to see a numerical limit here. So we've got the world price for oversized lollipops is $2.50. At the world price, domestic demand is 85,000 oversized lollipops and domestic supply is 20,000 oversized lollipops, and then the government sets an import quota of 25,000 units. So let's go ahead and see what happens. First, let's label some of this on our graph. So we've got first a world price of 2.50, right? So this red line right here is going to represent our world price, and then we've got our domestic demand of 85,000. Right? At this world price, we're going to have domestic demand out here. Right? Quantity demanded is going to be 85,000, and at the world price, our quantity supply down here is 20,000. Wait. Let me put quantity supplied first. So quantity supplied is going to be 20,000. Right? So that's our original situation and now the government comes in and sets an import quota of 25,000 units. So what's happening originally? Right? I'm going to scroll down now. Originally we have this when we don't have a quota or a tariff or anything and we've got free trade, we're going to see that we're going to be importing 65,000 units, right. The difference between the quantity demanded and the quantity supplied is 65,000 units that are being imported, when there's no restriction, right. But now the government steps in and says you can only import 25,000 units. So how do we show this 25,000? What's going to happen is this line right here represents the 65,000 units, right? The 65,000 that are currently being imported. So what we need to do is find a place where only 25,000 are imported and that's going to be somewhere around here, right? If you'll notice on our graph, right, I was very specific with this graph, each of these squares is 10,000 down here, right? So if we've got 10,000, 20,000, 30,000, 40,000 right here, right? So this spot right here, that's going to be the quantity supplied with the quota is going to be here at 40,000, right? So I've got it all drawn to scale here, and over here this spot right here, that's going to be the quantity demanded with the quota, right? Quantity demanded with the quota and that's going to be right here in the middle of 6070 is 65,000 right there. Right? So what do you see? The distance between those two numbers, right, the quantity supplied with the quota and the quantity demanded, that difference there is our 25,000 units. Right? So the difference between these two is going to be the 25,000 import with the quota, right, with the quota, the 25,000 imports. Cool? So what's going to happen here? If this is the amount that's going to be imported, effectively what's going to happen is we're going to have this higher price right here, right? This higher price where the quantity supplied and quantity demanded is going to find its place right there, right? We've got our quantity supplied with the quota and our quantity demanded with the quota and we see that this distance between these two, right, that's going to be the amount of imports and that's what we've discussed below where we've got the 25,000. Right? So the imports with the quota went down to 25,000 and we've got this higher price, right? So in this situation, it looks like the price has gone up to $4 here with the quota, right? Cool. So now that we've seen what the quota does, it almost essentially looks like a tariff, right? We're going to see that we have a lot of similar conclusions to a tariff, right? Because with the tariff, what ended up happening we had a world price and then a bit higher price because of the tariff, right? The world price plus the tariff. Here we've got a similar situation. The quota has essentially increased the price domestically, right? So the world price is still $2.50, but now because of this import quota, the domestic price here is going to be that $4 right? We've got to see this $4 price in our market. Alright, so now that we've got that, let's go ahead and see what's happened to consumer surplus, producer surplus, all of that, right? So we've got let's go ahead and label sections of the graph. We've got this big area is going to be A. In here is B. C. We're going to have this triangle be D. This rectangle here, I'm going to erase this and I'll call this E. This one here is F, and here we've got G. Cool? So notice we're going to see a lot of similar stuff to what happened with the tariff. Alright? So before we set the quota, I'm going to go ahead and highlight. Don't highlight yet because I'm going to erase this for after the quota, right, because this is something we've seen before. Before the quota, the consumer surplus is everything above price, but below the demand curve, right? So it's going to include this whole area here. Yep. So that big triangle a little messy, but we've seen this before right? It's going to be the section A+B+C+D+E+F. Right? They've got that whole area there where the producers only get this little one G down here, right? They only get G everything below the price and above the supply curve. So producer surplus domestic was G, right? And you see that I've got producer surplus domestic, producer surplus foreign here. Well, we're going to see what happens with the quota, but before in our original situation we've got nothing with that foreign producer surplus, right? We've only got what we're used to and we'll see that there's no government revenue here, right? Because there's no tax and there's no deadweight loss, right? We're getting all the gains from trade. There's nothing impeding our trade, but now what's going to happen when we set this quota? So let me go ahead and erase this stuff and we will try again here. So now that we've got a quota, let's go ahead and reevaluate consumer surplus. So consumer surplus is going to be everything above the price, right, and below the demand curve. So when we see the new price is this higher $4 price, whoops, and we're going to see our consumer surplus be this triangle. Right? So they've lost some of their surplus because of the higher price. So we see that their surplus is just A+B now, right? They've lost C+D+E+F, right? They've lost all of that and you'll see that this is pretty similar to what's happened with tariffs so far. Alright and with producer surplus, the domestic producers, what's going to be their surplus? They're going to have C+G, right? They're going to have everything below the price but above the supply curve, From the consumers, but what's happened to D, E, and F? So let's talk about this surplus to the foreign producers, right? In this case, there's no tax, right? So the government revenue, government revenue is still zero, right? There was no tax imposed but what has happened, the price essentially has increased domestically, right? We've got this higher $4 price. So what do we see is that those imports that do happen, right? Because we still allowed what, 25,000 units to be imported. Those units that got imported, they're not going to be sold for $2.50, they're going to be sold at this higher price that results in our domestic market, right? We've got this price of $4 and that's what those imports are going to be sold at. So who's going to get that benefit is the foreign producers, right? Because the foreign producers would be willing to sell it at 2.50, but now those imports that did happen are going to be sold at $4 so those foreign producers are going to get this surplus in section E, right? So we saw with tariffs that section E went to the government but with a surplus or with a quota, it goes to the foreign producers, right? So that's the difference that we see here. And again, so I'll label that yellow. This yellow section is going to be our producer surplus for the foreign producers and again we're going to have deadweight loss, right? We're impeding on free trade, we're causing some trades not to happen, so we're going to have deadweight loss and again, like I told you in this chapter, we're going to have the bridge of deadweight loss. International trade, we're making the bridge. Right? We've got the bridge and that's going to be here.

Import Quotas

Alright, so I've got a big practice problem here. Let's just dive right in. Suppose the USA currently both produces and imports wacky waving inflatable arm flailing tube men. The government decides to restrict international trade by imposing a quota that limits the import of wacky wavy inflatable arm flailing tube men to 4,000 units. The figure shows the results of the quota.

Fill in the following table using the data in the figure. Alright. So we've got an import quota of 4,000 units, and we've got a graph here, with a bunch of information. So let's go ahead and start seeing what they're asking us here in this question. They're going to ask us a bunch of information, right, without the quota and with the quota, what changes? So let's start here with the world price. What is the world price with and without the quota?

So without the quota, we've got this low price, right? As we've seen, there's going to be this low price in the market, and that's going to be our world price, right? That's the world price, and what the quota is going to do is essentially increase that price a little bit. So we know that the lower of the two is going to end up being the world price. So the world price here without the quota is going to be $10. How about with the quota? Well, it's still going to be $10. The price everywhere else, everywhere in the world, is $10. It's just in our market, in our USA market here, that we're going to be affecting that price.

So what are we going to see? What's going to be the USA price without the quota? Well, without the quota, we're going to see that we're at that $10, right? The USA price is going to equal the world price without the quota, but now when we add the quota, we're going to increase, essentially the price is going to find its way up to here, right, because of the quota. There's going to be fewer imports, it's going to restrict trade a little bit, it's going to cause that price to increase. Alright? So what do we see? With the quota, the US price has gone up to $12.

Alright, let's go on to the next one here. It's asking us the quantity supplied by US firms. Alright? So the quantity supplied by US firms without the quota is going to be where that price, the world price, touches the supply curve. So here we've got our supply curve. Let me do it in a different color. And we've got this point right here, right? The world price touches the supply curve right there, and we see that that's at a quantity supplied of 6,000 units, right? So that's going to be the quantity supplied without the quota. So the quantity supplied without quota is going to be 6,000 units. And what's going to happen with the quota? Well, when we do add the quota, it's going to essentially get us to this higher price, the $12, right? So what are US producers going to put on the market at $12? Well, it's where it touches the supply curve, right? So the $12 touches the supply curve right there, and we're going to see that the quantity supplied with the quota, I'm going to put an 'q' there for the quota, has gone up to 10,000. Right? And that's because there's a higher price, so they're willing to put more units out there. So 10,000 units are going to be the quantity supplied with the quota.

How about the quantity demanded by US consumers without the quota first? So without the quota, just in the same way, we're going to be at that world price. Right? So without the quota, the demand curve touches the world price way out here, and we're going to see that this is going to be the quantity demanded domestically, right, without the quota. They're going to be demanding 16,000 units. And what's going to happen after the quota? Well, we're going to move to this other point, right? It's where it touches the $12 line. The demand curve touches the $12 line right there, and that's at 14,000 units. So that's the quantity demanded with the quota. Right? So we've got 14,000 units there, and what do we see in the middle of here? Right? So if we look right in between the 10,000 and the 14,000, right, the difference between these, that's the amount of the quota. It told us above that the import quota was 4,000 units, right. It told us that, the government's going to set a quota of 4,000 units and that's exactly what we see here. Right? That's the distance between the quantity demanded and quantity supplied with the quota.

So let's go ahead and see the quantity imported. So the quantity imported without the quota, right, that's going to be the difference between the quantity demanded and quantity supplied without the quota. So what were our quantity demanded and quantity supplied without the quota? Well, it was 16,000, was the quantity demanded, right, minus the quantity supplied was 6,000. So the difference there of 10,000 is going to be the amount of imports when we didn't have a quota. Alright. So that's going to be 10,000 units being imported without the quota, and that makes sense.

Alright, cool. So let's go on to the next one and talk about the area of consumer surplus. So what was the area of consumer surplus without the quota? So without the quota, it's everything above the price, right, which the price was $10 in that situation, but below the demand curve, and that's going to give us this big triangle here that includes everything, a, b, c, d, e, and f. Right. It includes all of those regions. So our consumer surplus without the quota, I'm going to write the area of a plus b plus c plus d plus e plus f. Right? They have all of those sections. Now what about without the quota, or excuse me, with the quota, so I'm going to erase all that. With the quota, we've got this higher price. Right? So we're going to see that consumer surplus is everything above that price of $12, but under the demand curve, and we're going to get this big region right here, a plus b. Right? So they've lost that section c, d, e, f, and all that's left is that a plus b. So the consumer surplus has decreased, right, and that's what we expect with an import quota and we've got a consumer surplus of a+b. How about the domestic producer surplus? So we're talking only about the domestic producers, and before, before the quota, right, right, without the quota, what was their surplus? Their surplus was just this section g, right, because it's everything below the price but above the supply curve. It was just g without the quota. Alright? And what about with the quota? Well, now we've got a higher price, right? So they're able to capture a little more surplus. So it's still going to have g but it's going to include this section C as well, right? Because that's under the price and above the supply curve. Cool. So that area right there is going to be c+g. Right? So they've gotten that extra bit of surplus because of the higher price. Now what about deadweight loss? Without the quota, as we've seen, right, when there's free trade, there's no deadweight loss, right? All of the sections are being captured as surplus. Now when we add this quota, we're restricting trade, captured as surplus. Now when we add this quota, we're restricting trade. We're going to lose some of those trades here, right? And remember, we talked about the bridge of deadweight loss. So when we talk about international trade, we've got the bridge of deadweight loss, and it's going to be like this. Right? We build our bridge right here. The international trading bridge of deadweight loss. So here we go. We've got this section d and f. That is going to be our deadweight loss. Cool. So that's about it here. We've seen where all these sections are, right? We've pulled out all these numbers and notice on the graph they tricked us. They gave us these sections h, I, j, k, right? We don't those don't end up being anything right? They're just extra sections and we know that that section E with the quota, right? That section E is going to be surplus to foreign producers, right? If it was a tariff instead of a quota, that would have been government revenue inside of section E.

Alright, cool. Let's go ahead and move on to the next video.

Here’s what students ask on this topic:

What is an import quota and how does it affect domestic markets?

An import quota is a government-imposed limit on the number of units of a particular good that can be imported into a country. By restricting the supply of imported goods, import quotas help protect domestic suppliers from low world prices. This leads to an increase in the domestic price of the good. For example, if the world price of oversized lollipops is $2.50 and an import quota of 25,000 units is set, the domestic price may rise to $4. This benefits domestic producers by allowing them to sell at higher prices but reduces consumer surplus as consumers have to pay more. Unlike tariffs, import quotas do not generate government revenue; instead, the surplus goes to foreign producers who can sell at the higher domestic price.

How do import quotas compare to tariffs in terms of economic impact?

Both import quotas and tariffs are trade restrictions that increase domestic prices and protect domestic producers. However, they differ in their economic impacts. Tariffs generate government revenue by imposing a tax on imported goods, which raises the domestic price by the amount of the tariff. Import quotas, on the other hand, limit the quantity of goods that can be imported, leading to higher domestic prices without generating government revenue. Instead, the surplus from the higher prices goes to foreign producers. Both measures reduce consumer surplus and create deadweight loss, but the key difference lies in who benefits from the higher prices—government in the case of tariffs and foreign producers in the case of quotas.

What is a Voluntary Export Restraint (VER) and how does it function?

A Voluntary Export Restraint (VER) is a self-imposed limit by an exporting country on the quantity of goods it exports to another country. This is usually the result of negotiations between the exporting and importing countries. VERs function similarly to import quotas in that they restrict the supply of goods, leading to higher prices in the importing country. The economic effects are similar to those of import quotas: domestic prices rise, consumer surplus decreases, and producer surplus increases for both domestic and foreign producers. However, like quotas, VERs do not generate government revenue. They are often used as a political tool to avoid more stringent trade barriers like tariffs.

Why might a government choose to implement an import quota instead of a tariff?

A government might choose to implement an import quota instead of a tariff for several reasons, primarily political. While tariffs generate revenue for the government, they can strain international relations as they are seen as more aggressive trade barriers. Import quotas, on the other hand, allow foreign producers to benefit from higher domestic prices, which can make them more palatable in diplomatic negotiations. Additionally, quotas can be used to provide more predictable protection for domestic industries by capping the number of imports, whereas tariffs only make imports more expensive without limiting their quantity. This predictability can be crucial for long-term planning in certain industries.

What are the main economic effects of an import quota on consumer and producer surplus?

An import quota has several key economic effects on consumer and producer surplus. By limiting the number of imports, an import quota raises the domestic price of the good. This leads to a decrease in consumer surplus because consumers have to pay higher prices and have fewer choices. For example, if the price of oversized lollipops rises from $2.50 to $4 due to a quota, consumers lose the surplus they previously enjoyed at the lower price. On the other hand, producer surplus increases for both domestic and foreign producers. Domestic producers benefit from higher prices and reduced competition, while foreign producers gain from selling their limited imports at the higher domestic price. However, the overall market efficiency decreases due to the deadweight loss created by the quota.