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A-Level Economics · Import quota diagram question

How does the quota's effect on the domestic PRICE compare with a tariff's?

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The answer

Both push the domestic price above PW — the quota does it by restricting quantity rather than by taxing each unit. Same destination, different route: a tariff taxes imports up to PW+T; a quota starves the market of imports until the price climbs to Pq. Both are protectionism and both raise the domestic price above the world price. The tariff does it by taxing each imported unit; the quota does it by capping the quantity, so the market has to move back up towards the no-trade price to clear. In the extreme case of zero imports the price returns all the way to the autarky level at E.

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This is one of 6 questions on the import quota diagram — every corner lettered, every wrong answer diagnosed.

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