Tutorial on Partial Equilibrium Modeling:
Import Quota by a Large Country
Importer
The Microeconomics of International Trade
ECN 230
Roberto J. Garcia
School of Economics and Business, UMB
Economic effects of an import quota
Import quota
A import quota is a trade policy instrument that
aims to limit directly the traded volume between
countries, e.g., setting the quantity imported,
[QM]1, equal to a targeted quantity, Qq.
By limiting the quantity imported, a quota has
implications for prices, which affects economic
behavior and welfare. The economic effects are
studied by analyzing the change in prices on:
Production, consumption and trade patterns, and
Producer and consumer welfare and the ability to earn
quota rents by the governments or private agents.
A quota requires additional administrative (e.g.,
customs) measures to ensure that [QM]1  Qq.
2
Economic effects of an import quota
Market analysis
Analyzing the production, consumption and trade
effects: the perspective of the importing country
Importer's domestic market
P
S
World market
PW
[PD]1
[PD]1
PW
PW
[PW]1
[PW]1
D
[QS]0 [QS]1 [QD]1 [QD]0


Q
ES
ED
1
[QM]1 [QT]0

ED
QT
3
Economic effects of an import quota
Economic intuition and expectations
Regardless of the reason for a quota being implemented,
the result is a reduction in the quantity imported, such
that the quantity imported is  [QM]1 (ED1 is kinked
becoming vertical at [QM]1 intersecting ES at [PW]1).
• The world price decreases (PW) because a large buyer on the
international market reduces demand, i.e., a negative TOT
effect.
• The internal price in the importer's market increases (PD)
because there is greater scarcity of the good on the domestic
market.
Producers and consumers react to the change in the
domestic price, from PW to [PD]1.
• Producers respond to price increases by increasing output, QS.
• In partial equilibrium analysis, a price increase is expected to
result in a decrease in consumption, QD.
Quota rents can be collected. Who collects the rents
depends on how the quota is implemented (i.e., the
licensing procedure to allocate the quota).
4
Economic effects of an import quota
Welfare analysis
Analyzing economic costs and income transfers
among producers, consumers, traders and the
government: the importing country's perspective
Importer's market
P
[PD]1
PW
Welfare analysis
Δ CS
- (a+b+c+d)
S
b
a
Δ PS
ΔG
d
c
e
[PW]1
D
[QS]0 [QS]1 [QD]1[QD]0
Q
+ (a)
+ (c+e)
- (b+d) + (e)
Δ NSW
Assumes the government
earns the quota rents.
5
Economic effects of an import quota
Economic interpretation of welfare areas
Area 'a' represents the value lost by consumers that is
gained by producers, i.e., a tax on consumers; it is an
income transfer from the consumer to the producer.
Area 'b' represents a part of the total value lost by the
consumers that is not transferred to any other economic
agent in the economy; it is a "dead-weight loss" (DWL)
in production.
• The DWL in production is the cost to society of producing
more of the good in which the country has a comparative
disadvantage.
• The increased production reflects a misallocation of resources
because resources are being used inefficiently.
Area 'c' represents a value lost by consumers making up
part of the quota rents; if government sold import
licenses at the market rate, then 'c' would be a cost the
exporter pays which is past on to the consumer.
6
Economic effects of an import quota
Area 'd' represents part of the value lost by consumers
that is not transferred to any other economic agent; it is
a "dead-weight loss" (DWL) in consumption.
• The DWL in consumption is the cost to society of consuming
less of the imported good as a result of distorted prices.
• The decreased expenditures reflects a misallocation of
resources in consumption (ie, a non-optimal consumption mix).
Area 'e' represents the quota rents that can be collected
along with area 'c'; the total quota rents are (c+e) which
is equal to {[PD]1 – [PW]1} · [QM]1; however, area 'e' is
an income transfer from the exporter to the government
resulting from the TOT effect of the quota (i.e., the
policy-induced reduction in demand by a large
international buyer that lowered PW).
The net effect of the quota on the importer is uncertain
because the negative DWLs can be offset by the income
transfer from the exporting country. It will also depend
on how the quota is administered and rent collection. 7
Economic effects of an import quota
Market analysis
Analyzing the production, consumption and trade
effects: the perspective of the exporting country
World market
Exporter's domestic market
P
PW
D
S
ES
PW
PW
[PW]1
[PW] 1
ED1
[QX]1 [QT]0
ED
QT
[QS]0 [QS]1[QD]1 [QD]0


Q
8
Economic effects of an import quota
Economic intuition and expectations
Application of an import quota results in a reduction in
the quantity imported. Graphically, ED1 is kinked
becoming vertical at [QM]1 if the quota is binding. It is
assumed that the export-country's government does not
take any policy action to counter the quota.
• The world price decreases (PW) because a large buyer on the
international market reduces demand.
• The internal price in the exporter's market is the new world price
because no policy action has been taken.
Producers and consumers react to the change in the
domestic price, from PW to [PW]1.
• Producers respond to price decreases by decreasing output, QS.
• In partial equilibrium analysis, a price decrease is expected to
result in an increase in consumption, QD.
Because the export-country government has not taken
action, there are no budgetary outlays on, taxes from, or
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rents collected from licensing the exported good.
Economic effects of an import quota
Welfare analysis
Analyzing economic costs and income transfers
among producers, consumers, traders and the
government: the exporting country's perspective
Welfare analysis
+ (1)
Δ CS
Exporter's market
P
D
PW
[PW]1
Δ PS
ΔG
- (1+2+3+4)
0
- (2+3+4)
Δ NSW
S
1
2
3
4
[QD]0[QD]1[QS]1 [QS]0
Assumes the importcountry's government
collects all quota rents
Q
10
Economic effects of an import quota
Economic interpretation of welfare areas
Area '1' represents the value gained by consumers from
the lower price; it is an income transfer from producers
to consumers.
Area '2' represents a part of the total value lost by the
producer that is not transferred to any other economic
agent in the economy; it is a "dead-weight loss" (DWL)
in consumption.
• The DWL in consumption is the cost to society of consuming
more the exportable good and becoming less reliant on trade.
• The increased consumption reflects a misallocation of
resources because the world price has been distorted.
Area '3' represents the value lost by producers that is
gained by the importing government; it is an income
transfer from the producer/exporter to the importer's
government in the form of a tax as a result of the TOT
effect.
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Economic effects of an import quota
Area '4' represents a part of the value lost by the
producers that is not transferred to any other economic
agent in the economy; it is the "dead-weight loss"
(DWL) in production.
• The DWL in production in the exporting country is the cost to
society of producing too little of the exportable good, the good
in which the country has a comparative advantage.
• The decreased production reflects a misallocation of resources
away from the export sector, stifling the specialization process.
The net effect of the import quota, administered by the
government of the importing country, on the exporting
country is negative, resulting in the DWLs and an
income transfer to the importing country. An import
quota that is administered differently to the scenario in
this example can result in a much different net effect
because the quota rents can accrue to the exporter, the
exporting country's government or shared among many
different agents in both countries.
12
Economic effects of an import quota
Net world welfare effects
Internal domestic transfers,
DWLs and international transfers
Δ NSW
Importer
Importer's market
P
Exporter's market
Exporter
P
S
D
d
[PD]1
PW
[PW]1
S
a
4
b c
e
PW
[PW]1
1
World
- (b+d)
+ (e)
- (2+4)
- (3)
(e) = (3)
- (b+d)
- (2+4)
2 3
D
[QS]0 [QS ]1[QD]1[QD]0
Q
[QD]0 [QD]1[QS]1 [QS]0
Q
13
Economic effects of an import quota
Concluding comments
The import quota by a large country results in a TOT effect
that affects importers and exporters differently:
1. A decrease in the world price benefits the importing country(ies)
at the expense of the exporting country(ies)
2. The higher domestic price in the importing country is a price
support to domestic producers which is paid by domestic
consumers.
3. The lower world price in the exporting country is a tax on its
producer/exporters, particularly if they do not earn the quota rents.
Consumers in the exporting country benefit from a lower price.
4. Assuming all rents go to the importing country's government,
part of the rents collected is an international income transfer from
the producers/exporters, i.e, it is a tax by the importer on the
exporter, and the other part is a transfer from domestic consumers.
5. The net effect of the quota on the world economy is an
international income transfer and a series of DWLs in production
and consumption in both countries because prices have been
distorted. This is the case regardless of which economic agent
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collects the quota rents and how the quota is administered.