ANNOUNCEMENTS

1
ANNOUNCEMENTS
Undergraduate Economic
Society Career Opportunities for Economics
Majors in
Government Don Boyd, Director, Center for the
Study of the States, Rockefeller Institute of
Government Tuesday, October 26, 730PM, Earth
Science 241
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ADDING SUPPLY CURVES
Supply curve S2 in panel (b) is perfectly
elastic for 0 to q units at price p and
above. When added to demand curve S1


p
p
q
q
(a) (b) (c)
in panel (a), the demand curve in panel (c) is
obtained.
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THE EFFECT OF IMPORT QUOTAS
Since consumers gain from imports while
producers lose, one way to give some gains to
consumers while partially protecting
producers is with import quotas. The government
decides what the total (legal) level of imports
of a product will be, and then issues licenses to
importers authorizing them to import up to their
legal limit, or quota, on imports. Consumers
gain from the imported quota, but producers are
protected
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THE EFFECT OF IMPORT QUOTAS
from competition from imports above the
quota. Since the best solution is free trade, we
will compare the effect of an import quota with
a free trade result.
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THE EFFECT OF IMPORT QUOTAS
With trade, before the quota, the market price
is the world price, P1. Domestic quantity
supplied is QS1 and domestic quantity demanded
is QD1. Imports QD1-QS1. After the
Equilibrium without trade
Quota
A
B
Equilibrium with quota
P2
Equilibrium with trade
E
C
D
E
F
P1
G
Imports with quota
QS1 QS2 QD2 QD1

Imports without quota
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THE EFFECT OF IMPORT QUOTAS
quota, imports are legally restricted to
the quota amount. Then world supply is
perfectly elastic up to the quota amount
(see panel (b) of slide 2). The new supply
curve is the sum of domestic
Equilibrium without trade
Quota
A
B
Equilibrium with quota
P2
Equilibrium with trade
E
C
D
E
F
P1
G
Imports with quota
QS1 QS2 QD2 QD1

Imports without quota
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THE EFFECT OF IMPORT QUOTAS
supply curve and the import supply, restricted by
the quota. (See panel (c) in slide 2.) After
the quota, price rises to P2, domestic
quantity supplied rises to QS2, and domestic
quantity
Equilibrium without trade
Quota
A
B
Equilibrium with quota
P2
Equilibrium with trade
E
C
D
E
F
P1
G
Imports with quota
QS1 QS2 QD2 QD1

Imports without quota
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THE EFFECT OF IMPORT QUOTAS
demanded falls to QD2. Imports are now
QD2-QS2quota amount.
Equilibrium without trade
Quota
A
B
Equilibrium with quota
P2
Equilibrium with trade
E
C
D
E
F
P1
G
Imports with quota
QS1 QS2 QD2 QD1

Imports without quota
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THE EFFECT OF IMPORT QUOTAS
With trade, before the tariff, consumer surplus
is the area above the world price and below the
domestic demand curve -- ABCDE EF.
After the quota, consumer
Equilibrium without trade
Quota
A
B
Equilibrium with quota
P2
Equilibrium with trade
E
C
D
E
F
P1
G
Imports with quota
QS1 QS2 QD2 QD1

Imports without quota
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THE EFFECT OF IMPORT QUOTAS
surplus is the area above the price P2
and below the domestic demand curve -- AB. After
the quota, producer surplus is the area above
the domestic supply curve and below price P2 --
Equilibrium without trade
Quota
A
B
Equilibrium with quota
P2
Equilibrium with trade
E
C
D
E
F
P1
G
Imports with quota
QS1 QS2 QD2 QD1

Imports without quota
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THE EFFECT OF IMPORT QUOTAS
GC. Note that import license holders are
allowed to import quantity QD2-QS1 for world
price P1 and sell it domestically for price P2.
The profit is area EE.
Equilibrium without trade
Quota
A
B
Equilibrium with quota
P2
Equilibrium with trade
E
C
D
E
F
P1
G
Imports with quota
QS1 QS2 QD2 QD1

Imports without quota
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THE EFFECT OF IMPORT QUOTAS
Before Quota After
Quota Change CS
ABCD AB -(CDEEF)
EEF PS
G CG
C Import license holders
None EE
(EE) Total ABCD
ABCG -(DF)
EEFG EE
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THE EFFECT OF IMPORT QUOTAS
The quota hurts consumers and benefits
import competing suppliers and license holders.
However, there is a net loss to society from the
quota.
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ARGUMENTS FOR PROTECTION
1. Jobs 2. National Security 3. Infant
Industry 4. Unfair Competition (Scientific
Tariff) 5. Protection as a Bargaining Chip
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EFFICIENCY OF MARKETS
So far competitive markets have been depicted as
efficiently allocating resources. The
equilibrium market quantity, is the quantity that
maximizes net social benefit -- the sum of
consumer and producer surplus. Just the right
amount of resources are allocated to the
production of the good. Interference with the
operation of a competitive market -- price floors
or ceilings, taxes, tariffs and quotas -- are
inefficient and lead
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EFFICIENCY OF MARKETS
a deadweight loss. However, there are
situations when competitive markets do not
allocate resources efficiently, and where
government interference can improve social
welfare by increasing the sum of consumer and
producer surplus. One instance is when there are
externalities.
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EXTERNALITIES
An externality is the impact of one persons
actions on the well-being of a
bystander. Externalities can be either beneficial
(positive), as the benefits to neighbors and
passers by of a well maintained house and yard,
or the technological spillovers from the space
program. They can be detrimental (negative), as
second hand smoke from a cigarette smoker at a
party, or the noise from a factory near a
residential
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EXTERNALITIES
neighborhood.