Skip to content
Sem 5 Prep
← Intl TradeImport quotas and non-tariff barriers

Formulas for this chapter

Finding the domestic price under a quota

Find P such that quantity demanded(P) - quantity supplied(P) = quota

The first step of every quota problem, and the step a tariff problem does not have. A tariff gives you the price and you read the quantities; a quota gives you the quantity and you must search for the price.

Quota
Units of imports the government permits
P
Domestic price, the unknown you are solving for

Quota licence rent

Total rent = quota x (domestic price - world price)

To value the import licences. Auctioned competitively this becomes government revenue and the quota is equivalent to an implicit tariff of (domestic price / world price) - 1; handed out, it is monopoly profit for the holders.

Quota
Units permitted
Domestic price
Price at which the market clears with the quota in place
World price
Price at which the licence holder buys abroad

Export subsidy: the price you can quote

Effective cost = cost of production - subsidy per unit Quotable price = effective cost + target profit per unit

The class's rupee example. Compute your unsubsidised price first, then note that the subsidy needed to match a rival is simply the gap between that price and the rival's price.

Cost of production
Own cost per unit, Rs 100 in the class's example
Subsidy per unit
Government payment per unit exported
Target profit
Margin on cost the exporter wants to keep, Rs 20 in the example

Export subsidy: net welfare effect

Net effect = producer surplus gain - consumer surplus loss - subsidy cost

For an exporting nation. The subsidy cost uses exports after the subsidy, mirroring the rule that tariff revenue uses imports after the tariff. The answer is always negative for a small nation.

Producer surplus gain
Old output x price rise, plus the triangle on the new output
Consumer surplus loss
Units still consumed x price rise, plus the triangle on those that drop out
Subsidy cost
Exports after the subsidy x the subsidy per unit
Step 3 of 32
The real wordsTheory

The import quota

Import quotaA direct quantitative restriction on the amount of a commodity allowed to be imported or exported.

Two stated purposes:

  • To protect domestic industry and agriculture
  • For balance of payments reasons

Note the word quantitative. A tariff works on price and lets quantity settle wherever it settles. A quota works on quantity and lets price settle wherever it settles. Everything else follows from that reversal.

← BackContinue →