quota diagram

• Before the quota is imposed?

  The world price is P1

  Domestic demand is Q2

  Domestic output is Q1

  Imports are Q2-Q1

  
• assumption that the government only

  wants imports (stage 2)?

  imports are Q4-Q3 instead of Q2-Q1.

  Total supply is less than it would otherwise have been,(Q4-Q3 rather than Q2-Q1) the price is going to rise to P2.

  
• After the quotas imposed (stage 3)?


  Domestic demand contracts from Q2 to Q4 at the higher price of P2.

  Domestic production extends from Q1 to Q3 (incentivised by the higher price).

  
• what happens to surpluses after the quota is

  imposed? (stage 4)

  Consumer surplus is reduced by ABCD.

  Producer surplus increases by A.

  Note: there is no government tax revenue from quota.

  Net welfare loss to the importing country is BCD.

  
• how do Quotas lead to gains (final stage)?

  foreign companies manage to retain orders are now getting a higher price – there's a windfall

  gain for them of C.

  Net welfare loss to the world economy is B+D.