The deadweight loss from an import quota

1
The deadweight loss from an import quota

• Foreign and domestic cars are perfect
  substitutes
  
• Supply of domestic cars is upward sloping
• Supply of imported cars is infinitely elastic
  (horizontal) at price P0
  
• The case of an import tariff is on the lecture
  slides lets look now at the impact of an import
  quota on automobiles.

2
Price/unit
Without a quota supply is the lower (minimum) of

the two supply functions
SD
A quota QQ (less than QF) is introduced to find
the new supply, answer the question how many ca
rs will be produced at any given price. The new s
upply is depicted with red.
D
Equilibrium point w/ quota
Equilibrium point w/o quota
P
SF
P0
QQ
QF
Quantity
Q
QD
QQ
The new equilibrium involves a higher price P
and a lower quantity QQ
3
Welfare effects
Price/unit
Ignore transfers from CS to PS the deadweight
loss is
the triangle composed of lost CS
SD
D
Used to be part of CS now it is part of the DWL
Used to be part of CS now its part of the
domestic producers surplus
Used to be part of CS now it is the foreign
producers surplus.
Used to be part of CS now its part of the
domestic producers surplus
Used to be part of CS with a quota is part of th
e DWL
P
SF
P0
QQ
Deadweight loss
QF
Quantity
Q
QD
QQ