Page 188 - The Principle of Economics

190
PART THREE
SUPPLY AND DEMAND II: MARKETS AND WELFARE
Figure 9-7
THE EFFECTS OF AN IMPORT QUOTA. An import quota, like
a tariff, reduces the quantity of imports and moves a market closer to the equilibrium that would exist without trade. Total surplus falls by an amount equal to area D 􏰀 F. These two triangles represent the deadweight loss from the quota. In addition, the import quota transfers E' 􏰀 E'' to whoever holds the import licenses.
Price of Steel
Isolandian price with quota
Price without 􏰂 quota
Equilibrium without trade
Domestic supply
Quota
Equilibrium with quota
Domestic supply
􏰀 Import supply
World price
A
B
F
G
C
D
E􏰃
E􏰄
Imports with quota
Domestic demand
World price
0 QS QS 1221
Imports without quota
QD QD
Quantity of Steel
Consumer Surplus Producer Surplus License-Holder Surplus
BEFORE QUOTA
A 􏰀 B 􏰀 C 􏰀 D 􏰀 E' 􏰀 E'' 􏰀 F G
None
AFTER QUOTA
A 􏰀 B
C 􏰀 G E' 􏰀 E''
CHANGE
􏰁(C 􏰀 D 􏰀 E' 􏰀 E'' 􏰀 F) 􏰀C
􏰀(E' 􏰀 E'')
Total Surplus
Table 9-4
A 􏰀 B 􏰀 C 􏰀 E' 􏰀 E'' 􏰀 G
A 􏰀 B 􏰀 C 􏰀 D 􏰀 E' 􏰀 E'' 􏰀 F 􏰀 G
The area D 􏰀 F shows the fall in total surplus and represents the deadweight loss of the quota.
􏰁(D 􏰀 F)
CHANGES IN WELFARE FROM AN IMPORT QUOTA. The table compares economic welfare when trade is unrestricted and when trade is restricted with an import quota. Letters refer to the regions marked in Figure 9-7.
Isolandian price of steel and the world price. Their surplus equals this price dif- ferential times the quantity of imports. Thus, it equals the area of the rectangle E' 􏰀 E''. Total surplus with the quota is the area A 􏰀 B 􏰀 C 􏰀 E' 􏰀 E'' 􏰀 G.
To see how total welfare changes with the imposition of the quota, we add the change in consumer surplus (which is negative), the change in producer surplus (positive), and the change in license-holder surplus (positive). We find that total surplus in the market decreases by the area D 􏰀 F. This area represents the dead- weight loss of the import quota.