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Chapter_6_Non-tariff_Barriers

The increase in price facing home producers leads to

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The increase in price facing Home producers leads to a gain in producer surplus: ‘ a’. What changes with the quota is the area ‘ c’ which was government revenue under the tariff. With a quota, whoever is actually importing the good will be able to earn ‘ c’ , the difference between the world price and the higher Home price times the imports sold in the Home market.
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Import Quotas Area ‘ c’ represents the total quota rents . The welfare impact of quotas depends on the ways how these rents are allocated. There are four possible ways these rents can be allocated.
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Import Quotas 1. Giving the Quota to Home Firms: Quota licenses can be given to Home firms Permits to import the quantity allowed under the quota system. The net effects on Home welfare due to the quota are then as follows: Fall in consumer surplus -(a+b+c+d) Rise in producer surplus +a Quota rents earned at Home +c Net effect on Home welfare: -(b+d) This is the same loss we saw with a tariff. (b+d) is still a deadweight loss associated with the
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Import Quotas 2. Rent Seeking Because of the gains associated with owning a quota license, firms have an incentive to engage in inefficient activities in order to obtain them. How licenses are allocated matters. a. If licenses are allocated in proportion to each firm’s production, Home firms will likely produce more than they can sell just to obtain the import licenses for the following year. b. Firms might engage in bribery or other lobbying activities to obtain the licenses.
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Import Quotas Some suggest that the waste of resources devoted to rent seeking could be as large as the value of the rents themselves, c. If rent seeking occurs, welfare loss of quota is: Fall in consumer surplus -(a+b+c+d) Rise in producer surplus +a Net effect on Home welfare: -(b+c+d) This loss is larger than a tariff. It is thought rent seeking is worse in developing countries.
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Import Quotas 3. Auctioning the Quota The government of the importing country to auction off the quota licenses. In a well-organized, competitive auction, the revenue collected should exactly equal the value of the rents. Fall in consumer surplus -(a+b+c+d) Rise in producer surplus +a Auction revenue earned at Home +c Net effect on Home welfare: -(b+d) This is the same loss as the tariff.
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Australia and New Zealand During the 1980s, Australia and New Zealand both auctioned the quota licenses to import specific goods. The next table shows the value of imports covered by quotas and the value of bids for the quota licenses during 1981–1987. If we take the ratio of the value of bids to the value of imports covered by the quota, we obtain an estimate of the tariff equivalent to the quota. These are shown in the final column of the table.
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The increase in price facing Home producers leads to a gain...

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