Louis would not go down. The apples I used to eat would get reallocated to others with a negligible effect on prices. On the other hand, if the U. I consider this case below. The next three results deal with welfare costs. The full analysis requires a knowledge that areas under supply curves represent real resource costs and areas under demand curves represent willingness-to-pay, a measure of value. If you do not cover these topics in your course, I also provide intuition taken from the book that does not require this level of detail.
If you do cover this material, the book gives extra intuition. Before the tariff, total revenue of U. Costs were the area under the U. So profits before the tariff were G. Profits have increased by C.
Before the tariff, consumers consumed Q 1 shoes. After the tariff, consumers only have Q 2 shoes to enjoy. It is useful to divide this loss into two pieces. F is lost because fewer shoes, Q 1 -Q 2 fewer, are enjoyed. K is expenditures freed up to spend on something else, so the net loss is only F. This loss is alternatively called waste or dead-weight loss.
I usually derive this in a number of ways to help students get the intuition within the graph. The first way compares net value total value minus total cost before the tariff to net value after the tariff. The change in net value due to the tariff is a decrease of D and F. They measure the loss to society from the tariff, measured in dollars. The tricky part of chart is the total cost before and after the tariff. But this does not represent the real resource cost to America of the shoes that are consumed.
Before the tariff, America enjoyed Q 1 shoes. These shoes came from two sources, domestic and foreign. The cost of the Q 0 domestic shoes was the area under the U. Before the tariff, Q 1 -Q 0 shoes were imported. But those dollars are claims on American resources. There are two ways to make shoes. The first is to open a shoe factory and take leather and machines and people and make shoes the direct way. The second way is the roundabout way. Instead of making shoes, we make something that Brazilians want, for example, and swap this product for shoes.
That is what is really going on in the picture. After the tariff, America enjoys Q 2 shoes. What are the real resource costs of these shoes? Q 3 shoes are produced domestically.
Q 2 -Q 3 shoes are imported. It is a transfer from consumers of shoes to whomever the government spends the tariff revenue on. The tariff causes consumers to have fewer shoes, reducing consumption from Q 1 to Q 2. These lost shoes have a value equal to the area under the demand curve. But not buying shoes frees up expenditures to be made on other less valuable items. Consumers used to spend K on the shoes.
This is the amount freed up to have more of something else. So the net loss is only F. That choice tells us that he gets more pleasure or usefulness from a television than he does from the suit of clothes when they both have the same price.
In business, a quota can refer to a sales target that a company wants a salesperson or sales team to achieve for a specific period. Sales quotas are often monthly, quarterly, and yearly. Management can also set sales quotas by region or business unit. The most common type of sales quota is based on revenue. Quotas are different from tariffs or customs, which place taxes on imports or exports.
Governments impose both quotas and tariffs as protective measures to try to control trade between countries, but there are distinct differences between them. Quotas focus on limiting the quantities or, in some cases, cumulative value of a particular good that a country imports or exports for a specific period, whereas tariffs impose specific fees on those goods. Governments design tariffs also known as customs duties to raise the overall cost to the producer or supplier seeking to sell products within a country.
Tariffs provide a country with extra revenue and they offer protection to domestic producers by causing imported items to become more expensive. Quotas are a type of nontariff barrier governments enact to restrict trade. Other kinds of trade barriers include embargoes , levies, and sanctions. Quotas are more effective in restricting trade than tariffs, especially if domestic demand for something is not price-sensitive. Quotas may also be more disruptive to international trade than tariffs. Applied selectively to various countries, they can be utilized as a coercive economic weapon.
The U. Customs and Border Protection Agency, a federal law-enforcement agency of the U. Department of Homeland Security, oversees the regulation of international trade, collecting customs, and enforcing U. Various commodities are subject to tariff-rate quotas when entering the United States.
Highly restrictive quotas coupled with high tariffs can lead to trade disputes, trade wars , and other problems between nations. It was also a blow to the U. The U. Figure 7. Notice that there is a unique set of prices that satisfies the equilibrium conditions for every potential quota that is set.
At the extreme, if the quota were set equal to zero, then the prices in each country would revert to their autarky levels. In this case, the quota would prohibit trade. Jeopardy Questions. As in the popular television game show, you are given an answer to a question and you must respond with the question. Previous Section. It works like a combination of a price floor and a prohibition on entry. Generally, the immediate effects of a quota involve a transfer of money from buyers to sellers.
The inefficient production and surplus of the price floor are avoided because a production limitation created the price increase.
This transfer has an undesirable and somewhat insidious attribute. Because the right to produce is a capital good, it maintains a value, which must be captured by the producer. The individuals who receive the windfall gain are those who were driving taxis and were grandfathered in to the system and issued free medallions.
Those people who were driving taxis 70 years ago—and are mostly dead at this point—received a windfall gain from the establishment of the system. Future generations pay for the program, which provides no net benefits to the current generation. All the benefits were captured by people long since retired.
Does this mean that it is harmless to eliminate the medallion requirement?
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