What is the typical effect of import quotas and voluntary export restraints (VERs) on the domestic price of the restricted good?

• A. They cause the domestic price to fluctuate unpredictably.
• B. They have no effect on the domestic price of the restricted good.
• C. They increase the domestic price of the restricted good.
• D. They decrease the domestic price of the restricted good.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the concepts of import quotas and voluntary export restraints (VERs). Both are trade restrictions that limit the quantity of a good that can be imported into a country.
2. Step 2: Recognize that limiting the supply of a good through quotas or VERs reduces the total quantity available in the domestic market compared to a free trade scenario.
3. Step 3: Recall the basic supply and demand principle: when supply decreases and demand remains constant, the equilibrium price tends to rise.
4. Step 4: Apply this principle to the restricted good: since import quotas and VERs reduce supply, the domestic price of the good typically increases.
5. Step 5: Conclude that the typical effect of import quotas and VERs is to increase the domestic price of the restricted good, as the reduced supply creates upward pressure on prices.