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Principles of Economics- Mankiw (5th) 184

Principles of Economics- Mankiw (5th) 184 - 190 PA R T T H...

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190 PART THREE SUPPLY AND DEMAND II: MARKETS AND WELFARE Isolandian price of steel and the world price. Their surplus equals this price dif- ferential times the quantity of imports. Thus, it equals the area of the rectangle E' E''. Total surplus with the quota is the area A B C E' E'' G. To see how total welfare changes with the imposition of the quota, we add the change in consumer surplus (which is negative), the change in producer surplus (positive), and the change in license-holder surplus (positive). We find that total surplus in the market decreases by the area D F. This area represents the dead- weight loss of the import quota. D E E F C G B A Price of Steel 0 Quantity of Steel Domestic supply Domestic supply Import supply Domestic demand Isolandian price with quota Imports without quota Equilibrium with quota Equilibrium without trade Quota World price Price without quota World price Imports with quota 2 Q S 1 Q S 2 Q D 1 Q D Figure 9-7 T HE E FFECTS OF AN I MPORT Q UOTA . An import quota, like
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