An import quota drives up the domestic price and imposes a
deadweight loss on the importing country. With free trade, the domestic
price is the world price,. Imports are. If imports are restricted to
only , the domestic price must rise to the point where the restricted
level of imports just satisfies the domestic excess demand—this occurs
only at. The rise in price and reduction in consumption reduces
consumer surplus by areas ① + ② + ③ + ④. Domestic producers increase
their output as the domestic price rises, and producer surplus increases by
area ①. Area ③ does not accrue to the domestic economy; instead this
area represents extra producer surplus for the foreign firms that export
their product to this country. The net effect of the quota is a deadweight
loss for the importing country of areas ② + ③ + ④. Import quotas are
therefore worse than tariffs for the importing country.
Import quotas impose larger deadweight losses on the importing country than do tariffs that
lead to the same level of imports.pw Q 0 Q 1
Q 2 Q 3
Pd