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
• p_w = world (foreign) market price
• p* = market price w/ quota
• p* - p_w = 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