Impact Of A Quota

The graph above illustrates the impact of a quota. A quota limits the amount of a good that can be imported from abroad. In doing so, the domestic price of the good rises from the world price (P_W) to the new domestic price (P_D). The welfare effects are:

1. A --> Goes from consumers to producers
2. B --> Lost because domestic producers are less efficient than foreign producers.
3. C --> Lost because consumers stop consuming units of the good that they value above its true marginal cost.
4. D --> Transfered from consumers to whomever has the rights to the quota. If the government auctions off the quota, it can capture D.

References: Graph image from: Attach:quotasource.doc