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19 download_doc-15.php - into the domestic market(to sell...

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G202 (3/11/2009) Impact of Trade Restrictions o A quota  is a maximum quantity placed on imports. The quota indirectly affects the domestic price by creating a situation of  excess demand. o Quotas result in: o Less imports to the domestic market.  o Under-consumption in the domestic market. o Over-production by domestic producers. o Higher Domestic prices. Tariffs Vs. Quotas o One difference is that tariffs raise revenue while quotas do not. However, if quotas are combined with a licensing fee, they can raise  revenue. o Also, quotas can result in more inefficiency. If the license fee does not take away the price premium in the domestic  market (P Q —P W ), foreign producers will have an incentive to lobby to get 
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Unformatted text preview: into the domestic market (to sell at the higher price). Resources spent on lobbying will lead to the increased inefficiency. • Quota Graphically o After Trade (PW): CS = ABCDEFG PS = H o After Quota (P q ): CS = ABC PS = HD If no fee: F= foreign gains If fee=(Pq-Pw): F= gov rev If fee<(Pq-Pw): F is split between foreign gains and government revenue o Quota Inefficiency: Under-consumption = G Over-production = E If potential for foreign gains, lobbying costs will be some % of F...
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