limiting production - effectively changes the supply curve
- like w/ a price ceiling, limits the available supply
- remember that price floors don't necessarily limit the supply (especially for stupid companies)
- ie. number of alcohol licenses, New York taxi medallions
- ultimately helps the producers
- sort of like a combination of a price ceiling (limits supply for sure) and price floor (leads to an additional producer surplus for the most part)
- consumer surplus loses A+B
- producer surplus increases by A, decreases by C
- net change = loss of B+C (deadweight)
import restrictions - either w/ tariff (tax) or quota, serves to help domestic market
- w/o quotas, domestic consumers would buy solely/mostly from abroad instead of domestic markets
- to keep domestic markets alive, consumer surplus must suffer
- domestic markets want the quota to be 0, or for tariffs to be so high that foreign producers won't interfere w/ domestic market
- decreases competition, increases price >> increases revenue
- all at the expense of the consumer
- main difference between tariff and quota is that gov't earns money through a tariff and can channel that to the consumers
- of course, politically, it may be better for the gov't to use quotas than tariffs
- domestic supply curve
- pw = world (foreign) market price
- p* = market price w/ quota
- p* - pw = tariff that could replace the quota
- Q1 - Q2 = quota, note what happens when this goes to 0
- consumer surplus decreases by A+B+C+D
- domestic producer surplus increases by A
- if gov't used tariffs, it would get back C worth of revenue
- what happens w/ no quota at all
- consumer surplus increases dramatically >> consumption increases
- producer surplus very small, nonexistent if world price less than lowest domestic price
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