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 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