Import Quota (Trade Protectionism)

• Tariff


  A tax on imports
• Import quota

  A quantity limit placed on the number of imports coming into a country
• Analyzing how an import quota impacts a market

  1. Start with free trade

  2. Assume an import quota is put in place by the government

  3. Quota is set at q3

  4. Excess demand of q3 and q2 cannot be satisfied by imports due to the quota

  5. Leads to an increase in price

  6. Domestic suppliers increase supply to q4

  7. Domestic demand contracts from q2 to q4
• Impact of import quota

  • Leads to an increase in price
  • Domestic suppliers increase supply
  • Domestic demand contracts
• Import quota is put in place

  • Leads to a deadweight loss of consumer surplus
  • Leads to a deadweight loss of efficiency as domestic suppliers produce at a higher cost than world suppliers
• Arguments for protectionism

  • Protecting domestic industries and allowing them to grow
  • Preventing dumping (selling below cost of production)
  • Protecting domestic employment
  • Dampening the advantage of low-cost labor
  • Improving the trade balance
• The next video will go through the import quota diagram in more detail