An import quota does which of the following?

• A. Ensures that only high-quality goods are imported by setting minimum standards.
• B. Eliminates all tariffs on imported goods, increasing consumer surplus.
• C. Limits the quantity of a good that can be imported, potentially increasing domestic prices and reducing social welfare.
• D. Subsidizes domestic producers to encourage exports.

Answer: (C)

Verified step by step guidance

1. Understand the definition of an import quota: it is a government-imposed limit on the quantity of a specific good that can be imported into a country during a given time period.
2. Recognize that an import quota restricts supply from foreign producers, which can reduce the total quantity of the good available in the domestic market.
3. Analyze the effect of this reduced supply on domestic prices: with fewer imports allowed, domestic prices tend to rise due to the limited competition from abroad.
4. Consider the impact on social welfare: higher prices and restricted quantities can lead to a loss in consumer surplus and potential deadweight loss, reducing overall social welfare.
5. Compare the import quota to other trade policies such as tariffs or subsidies, noting that unlike tariffs which impose a tax, quotas directly limit quantity, and unlike subsidies, quotas do not provide financial support to producers.