Import Quotas and VERs - Video Tutorials & Practice Problems
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Import quotas and VERs result in effects similar to a tariff.
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Import Quotas and VERs
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So we've seen how a tariff has effects on a market when there's imports. Now, let's see another thing the government can do by setting a quota on imports. So, an import quota is going to restrict the number of units that can come in. It's gonna have a numerical limit, right? They're gonna say, hey, you can only import 1000 units of this. Good. And after that, we're not gonna import anymore, right? They're gonna set a numerical limit like that. So, we saw with the tariff, right, the tariff was gonna um help the domestic suppliers, but in this case, the import quota also helps the domestic suppliers right by defending them against these low world prices. Right? So again, it's gonna be easiest to see this on a graph. And in this case, I've used numbers um and I've been very specific in in making the graph so that we can see these this quota play out, right? We're gonna see a numerical limit here. So, we've got the world price for oversized lollipops is $2.50 at the world price. Domestic demand is 85,000 oversized lollipops. And domestic supply is 20,000 oversized lollipops. And then the government sets an import quota of 25,000 units. All right, so let's go ahead and see what happens. Um First, let's label some of this on our graph. So we've got first, um a world price of 2 50 Right? So this red line right here is going to represent our world price and then we've got our domestic demand of 85,000, right? At this world price. We're gonna have domestic demand out here, right, quantity demanded is gonna be 85,000. And at the world price or quantity supply down here is 20,000. What let me put quality supply first. So, quantity supplied is gonna be 20,000. Right? So that's our original situation. And now the government comes in and sets an import quota of 25,000 units. So, what's happening originally? Right, I'm gonna scroll down now. Uh originally we have this when we don't have a quota or a tariff or anything, and we've got the free trade, we're gonna see that we're gonna be importing 65,000 units, right? The difference between the quantity demanded and the quantity supplied is 65,000 units that are being imported uh when there's no restriction. Right? But now the government steps in and says you can only import 25,000 units. So how do we how do we show this? 25,000? What's gonna happen is this line right here represents the 65,000 units, right? The 65,000 that are currently being imported. So what we need to do is find a place where only 25,000 are imported and that's gonna be somewhere around here. Right. If you'll notice on our graph, right, I was very specific with this graph, um each of these squares is 10,000 down here. Right? So if we've got 10,000, 20,000, 30 40,000 right here. Right, So this spot right here, that's gonna be the quantity supplied with the uh I'm gonna put a queue for quota, quantity supplied with the quota is gonna be here at 40,000. Right? So I've got it all drawn to scale here and over here, this spot right here, that That's gonna be the quantity demanded with the quota, right, quantity demanded with the quota. And that's gonna be right here in the middle of 60 and 70 is 65,000 right there. Right, so what do you see the distance between those two numbers? Right. The quantity supplied with the quota and the quantity demanded? That difference there is our 25,000 units. Right, so the difference between these two is gonna be the 25,000 import with quota. Right. With the quota uh the 25,000 imports. Cool. So what's gonna happen here if this is the amount of that's gonna be imported effectively? What's gonna happen is we're gonna have this higher price right here, right. This higher price where the where the quantity supplied and quantity demanded is gonna find um it's it's it's uh it's it's placed right there, right, We've got our quantity supplied with the quota and our quality demanded with the quota. And we see that this distance in between these two. Right, that's gonna be the amount of imports and that's what we've discussed below, where we've got the 25,000, Right? So the imports with the quota went down to 25,000 and we've got this higher price. Right? So in this situation it looks like the price has gone up to $4 here with the quota. Right? Cool. So now that we've seen what the quota does, it almost essentially looks like a tariff, right? We're going to see that we have a lot of similar conclusions to a tariff, right? Because with the tariff, what ended up happening, we had a world price and then a bit higher price Because of the tariff, right? The world price plus the tariff here, we've got a similar situation. The quota has essentially increased the price domestically, right? So the world prices still to 50. But now because of this import quota, the domestic price here is going to be that $4, right? We see this $4 price in our market. Alright so now that we've got that let's go ahead and see what's happened to consumer surplus producer surplus, all of that. Right? So we've got let's go ahead and label sections of the graph, we've got this big area is gonna be a. In here is B. C. We're gonna have this triangle B. D. This rectangle here, I'm gonna erase this and I'll call this E. This one here is f and here we've got g. Cool. So notice we're gonna see a lot of similar stuff to what happened with the tariff. Alright, so before we set the quota, I'm gonna go ahead and highlight don't highlight yet. Um Because I'm gonna erase this for after the quota, right? Because this is something we've seen before before the quota, the consumer surplus is everything above price but below the demand curve. Right? So it's gonna include this whole area here, yep. So that big triangle a little messy. But we've seen this before, right? It's gonna be the section A plus B plus C. Plus D. Plus E. Plus F. Right? They've got that whole area there where the producers only get this little one G. Down here, right? They only get G. Everything below the price uh and above the supply curve? So producer surplus domestic was g. Right, and you see that I've got producer surplus, Domestic producer surplus foreign here. Well, we're gonna see what happens with the quota. But before in our original situation we've got nothing with that foreign producer surplus, right? We've we've only got what we're used to and we'll see that there's no government revenue here, right? Because there's no tax and there's no dead weight loss, right? We're getting all the gains from trade, there is no nothing impeding our trade. But now what's gonna happen when we set this quota? So let me go ahead and erase this stuff and we will try again here. So now that we've got um a quota, let's go ahead and re evaluate consumer surplus. So consumer surplus is gonna be everything above the price. Right? And below the demand curve. So when we see the new prices this higher $4 price, whoops. And we're gonna see our uh consumer surplus be this triangle, right? So they've lost some of their surplus because of the higher price. So when we see that their their surpluses just A plus B. Now, right, they've lost C. Plus D. Plus E. Plus F. Right? They've lost all of that. And you'll see that this is pretty similar to what's happened with tariffs so far. Alright. And with producer surplus, the domestic producers, what's gonna be their surplus? They're gonna have C. Plus G. Right? They're gonna have everything below the price but above the supply curve. So they're gonna get C. Plus G. So they've taken see right from from the consumers. But what's happened to D. E. And F. So let's talk about this surplus to the foreign producers. Right. In this case there's no tax, Right? So the government revenue, government revenue still zero, right? There was no tax imposed. But what has happened the price essentially has increased domestically. Right, we've got this higher $4 price. So what we see is that those imports that do I happen because we still allowed what 25,000 units to be imported? Those units that imported, they're not gonna be sold for 2 50 they're going to be sold at this higher price that results in our domestic market, right? We've got this price of $4 and that's what those imports are going to be sold at. So who's gonna get that benefit is the foreign producers, Right? Because the foreign producers would be willing to sell it at 2 50. But now those imports that did happen are going to be sold at $4. So those foreign producers are gonna get this surplus in Section E. Right? So we saw with tariffs that section E. Went to the government but with a surplus, or excuse me with a quota, it goes to the foreign producers, right? So that's the difference that we see here and again. So I'll label that yellow, this yellow section is gonna be our uh our producer surplus for the foreign foreign producers. And again we're gonna have deadweight loss right? Were impeding on free trade were causing some trades not to happen. So we're gonna have dead weight loss. And again, like I told you in this chapter, we're gonna have the bridge of dead weight loss. International trade. We're making the bridge right? We've got the bridge and that's gonna be here. The bridge across to F. Right? So D. And F. Are gonna be our dead weight loss. I'll highlight them here in this light blue, whoops D. And F. Is going to be dead weight loss. So D. Plus F. And you'll notice right again how similar this is uh let me get out of the way. So we'll finish this how similar it is to the situation with the tariff. Right? So deadweight loss went up by D. Plus F government revenue. There was no government revenue at all. And producers got e. Right, the foreign producers got E. So that's that's our situation with an import quota. So let's go ahead and uh make some conclusions here and talk about one more thing before we end this discussion. So an import quota causes consumer surplus to decrease, right? Because there's less imports happening, they get less of that advantage and the producer surplus. And I'll say domestic, well really domestic and foreign, right? The foreigners got some of our surplus to uh is going to is going to increase, right? We're gonna see that that producer surplus for both domestic and foreign, right? It says increase behind me, I'm not gonna get out of the way because we're just gonna keep talking. So we see that it increases. Right? So in this situation it's like why would a government ever set a quota instead of a tariff, Right, because the tariff, the government's gonna make money in this situation, it's the foreign the foreign producers that get that same box, Right. So why would they ever do a quota instead of a tariff. It all comes down to politics right? When we set a tariff, right? It's it's a little harder on the foreigners and they're not going to be as happy when we set a tariff quota, at least they get some of the benefit out of this, uh this trade restriction. So in the end, it's all kind of a political thing when it comes down to are we going to set a tariff, are we gonna set a quota? Uh, there's not really anything we can say about it here. So, um, last but not least, we've got this this idea of a voluntary export restraint. So when we talk about a voluntary export restraint, this is basically when a country self imposes a quota, right, there's gonna be some sort of agree between the two countries, where they say, okay, we're only gonna allow this many imports or this many experts. There's gonna be some politics obviously involved there as well. Right? But it's gonna end up being the same situation as an import quota, right? It's just that in this situation, the quota got set by the country that's doing the exporting, right? So usually when we, when we talk about the quota, it's gonna be our government, when we're importing our government saying, hey, you can only import so much this voluntary export restraint is the exporting country saying, hey, we're only going to export this much, Right? So it's kind of the same thing, just the opposite way around. So we're gonna have the same results when we got a voluntary export restraint. So let's conclude here with the tariff, we saw that the government, right, The government was gonna get some revenue, but with the import quota or a VR, we're gonna see that the foreign producers are gonna get are going to get that extra surplus, Right? So that's gonna be the main difference here between the tariff and an import quota. Is this government revenue versus the foreign producer surplus? Cool. So that's that's about it for import quotas. Let's go ahead and move on to the next video.
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example
Import Quota
Video duration:
9m
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Alright. So, I got a big practice problem here, let's just dive right in suppose the USA currently both produces and imports wacky waving inflatable arm flailing to men, the government decides to restrict international trade by imposing a quota that limits the import of wacky waving inflatable arm And failing to men to 4000 units. The figure shows the results of the Quota fill in the following table, using the data in the figure. Alright, so we've got an import quota of 4000 units. And we've got a graph here with a bunch of information. So let's go ahead and start seeing what they're asking us here in this question. They're gonna ask us a bunch of information, right? Without the quota? And with the quota, What changes? So let's start here with the world Price. What is going to be the world price? With And without the quota. So without the quota, we've got this low price, right? As we've seen, there's gonna be this low price in the market and that's gonna be our world price, right? That's the world price. And what the quota is gonna do is essentially increase that price a little bit, Right? So, we know that the lower of the two is gonna be end up being the world price. So, the world price here without the quota is gonna be $10. How bout with the quota? Well, it's still gonna be $10 right? The price everywhere else, everywhere in the world is $10. It's just in our market. And aren't uh USA market here that we're gonna be affecting that price. So what are we gonna see is what's gonna be the usa price without the quota? Well without the quota we're gonna see that we're at that $10 right? The USa price is going to equal The world price without the quota. But now when we add the quota we're gonna increase essentially the price is going to find its way up to here, right? Because of the quota, there's gonna be less imports. It's gonna restrict trade a little bit, it's gonna cause that price to increase. Alright? So what do we see with the quota? The us price has gone up to $12. Right, so let's go on to the next one here. It's asking us quantity supplied by us firms. Alright, So the quantity supplied by the U. S. Firms without the quota, it's gonna be where that price, the world price touches the supply curve. So here we've got our supply curve, let me do it a different color. Um We've got this point right here, right? The world price touches the supply curve right there and we see that that's at a quantity supply of 6000 units right? So that's gonna be the quantity supplied uh without the quota. So quality supplied without quota is going to be 6000 units Right? And what's gonna happen with the quota? Well when we do add the quota in, it's gonna essentially get us to this higher price, that $12, right? So what are you s producers going to put on the market at $12. Well it's where it touches the supply curve. Right? So the $12 touches the supply curve right there and we're gonna see that the quantity supplied with the quota, I'm gonna put a Q. There for the quota has gone up to 10,000. Right? And that's because there's a higher price. So they're willing to put more units out there. So 10,000 units is going to be the quantity supplied with the quota. How about the quantity demanded by U. S. Consumers Without the quota first? So without the quota, just in the same way we're gonna be at that world price. Right? So without the quota the demand curve touches the world price way out here and we're gonna see that this is gonna be the quantity demanded domestically, right? Without the quota they're gonna be demanding 16,000 units. And what's gonna happen after the quota? Well we're gonna move to this other point, right? That's where it touches the $12 line. The demand curve touches the $12 line right there and that's at 14,000 units. So that's the quantity demanded with the quota. Right? So we've got 14,000 units there. And what do we see in the middle of here? Right? So if we look right in between the 10,000 and the 14,000. Right? The difference between these that's the amount of the quota, it told us above That the import quota was 4000 units. Right? It told us the government's gonna set a quota of 4000 units. And that's exactly what we see here. Right. That's the distance between the quantity demanded and quantity supply with the quota. So let's go ahead and see the quantity imported. So, quantity imported without the quota. Right. That's gonna be the difference between the quantity demanded and quantity supplied without the quota. So it was our quantity demanded and supplied without the quota. Well, it was this 16,000, was the quantity demanded? Right? Minus the quantity supplied was 6000. So the difference there of 10,000 is going to be the amount of imports when we didn't have a quota. Right, so that's gonna be 10,000 units being imported without the quota. And that makes sense. Right. If we look at without the quote of the quantity supplied without the quota by us firms. Right here, and the quantity demanded right here of 16,000, well, that 10,000 is going to fill the gap of of those two numbers. Right. And that's gonna be the imports. So lets look at imports with the quota. And just like we said, there's a quota of 4000. Right, And that's what we see is the difference between the quantity demanded and quantity supplied with the quota? 14,000 minus 10,000. That's gonna give us that quantity imported, which is equal to our import quota of 4000 units. And again you can see here that the difference between the quantity supplied by us firms and by U. S. Consumers Is equal to that quota. Right? That 4000 fills that gap? Whoops. Alright cool. So let's go on to the next one and talk about the area of consumer surplus. So what was the area of consumer surplus without the quota? So without the quota it's everything above the price. Right? Which the price was $10 in that situation? But below the demand curve. And that's gonna give us this big triangle here. That includes everything A. B. C. D. E. And F. Right? It includes all of those regions. So our consumer surplus without the quota, I'm gonna say area of A plus B. Plus C. Plus D. Plus E. Plus F. Right. They have all of those sections. Now what about without the quota? Excuse me with the quota. So I'm gonna erase all that with the quota. We've got this higher price. Right? So we're gonna see that consumer surplus is everything above that price of 12. But under the demand curve and we're gonna get this big region right here A plus B. Right? So they've lost that section C. D. E. F. And all that's left, is that A plus B. So the consumer surplus has decreased. Right? And that's what we expect with an import quota and we've got a consumer surplus of A Plus B. How about the domestic producer surplus? So, we're talking only about the domestic producers and before before the quota. Right. Without the quota, What was their surplus? Their surplus was just this section G. Right, Because it's everything below the price, But above the supply curve, it was just G. Without the quota. Alright. And what about with the quota? Well, now we've got a higher price, right? So they're able to capture a little more surplus? So it's still gonna have G. But it's gonna include this section C. As well, right? Because that's under the price and above the supply curve. Cool. So that area, right, there is gonna be C. Plus G, right? So they've gotten that extra bit of surplus because of the higher price. Now, what about dead weight loss without the quota, as we've seen, right, when there's free trade, there's no dead weight loss, Right? All all of the sections are being captured as surplus. Now, when we add this quota, we're restricting trade, we're gonna lose some of those trades here. Right? And remember we talked about the bridge of dead weight loss. So when we talk about international trade, we've got the bridge of dead weight loss and it's gonna be like this, right, we build our bridge right here, the international trading bridge of dead weight loss. So here we go, we've got this section D. And F. That is going to be our dead weight loss. Cool. So that's about it. Here, we've seen where all these sections are, right. We've pulled out all these numbers and notice on the graph they tricked us. They gave us these sections H I J K. Right? We don't those those don't end up being anything right? They're just extra sections and we know that that section E with the quota, right, that section E is gonna be surplus to foreign producers, right? If it was if it was a tariff instead of a quota, that would have been government revenue inside of section E. Alright, Cool. Let's go ahead and move on to the next video.
