Import quotas
Kazakhstan is an apple producer, as well as an importer of apples. Suppose the following graph shows Kazakhstan's domestic market for apples, where S is the supply curve and D is the demand curve. The free-trade world price of apples (Pw) is $140 per ton. Suppose Kazakhstan's government restricts imports of apples to 80,000 tons. The world price of apples Is not affected by the quota. Analyze the effects of the quota on Kazakhstan's welfare.
Use the purple line (diamond symbols) to indicate the price of apples in Kazakhstan with the quota. Use the green quadrilateral (triangle symbols) to shade the area that represents the effect of the quota on producer surplus (PS). Use the red triangles (cross symbols) to shade the areas that represent the deadweight loss (DWL) resulting from the quota. Use the tan quadrilateral (dash symbols) to shade the area that represents the effect of the quota rents.
What is the equivalent import tariff for Kazakhstan's apple import quota?
Suppose Kazakhstan's government auctions off the quota licenses in a well-organized, competitive auction. Summarize the effects of the quota on welfare In Kazakhstan by filling in the blank cells in the following table. (Note: The entries in the right column should be in units of thousands of dollars; for example, to indicate a gain or loss of $500,000, you would simply enter "500.")
| Effect |
Gain or Loss? |
Amount(Thousands of $) |
| Consumer surplus |
|
|
| Producer surplus |
|
|
| Govemment revenue |
|
|
| Net welfare effect |
|
|
Gain or loss for each one
Suppose that instead of a well-functioning auction, domestic firms engage in rent seeking to get the quota licenses from the government and that the amount of resources devoted to these rent-seeking activities equals the value of the quota rents. In this situation, the net effect of the quota on welfare In Kazakhstan is a _____ of ____.
|
| $12.8 million |
| $6.4 million |
| $3.2 million |
| $16 million |
Suppose all of Kazakhstan's apple imports come from China, and Kazakhstan's government gives the authority for implementing the quota to the Chinese government. In this case, the net effect of the quota on welfare In Kazakhstan is a _____of ____.
| |
| $12.8 million |
| $6.4 million |
| $3.2 million |
| $16 million |