Key Diagrams - Import Quotas and Economic Welfare

This walk through revision video looks at the possible economic welfare effects of a government introducing an import quota.

Quotas restrict market access to imported products. The result is usually an increase in the domestic price paid by consumers. This leads to a fall in consumer surplus and lower real incomes. It can also cause a reduction in the amount of choice that consumers have in a market.

Some of the loss of consumer surplus goes to domestic producers who can expand their supply at the new higher market price. They see a rise in producer surplus.

But as we shall see, there is a deadweight loss of economic welfare. Unlike an import tariff, a quota does not lead directly to extra tax revenues for the government.

Quotas tend to cause a bigger fall in economic welfare because the government doesn’t gain any indirect tax revenue as they might expect from a tariff. Strict import quotas also create enforcement and compliance costs including border delays which act as further trade frictions and might drive up the cost of imports still further.