Lesson 4 of 6 · 14 min
Quotas, VERs and export subsidies
An import quota can raise the same price as a tariff, but the gain that would have been tariff revenue becomes a quota rent, and whoever captures it decides how much the importing country loses; export subsidies always reduce welfare.
In short
- An import quota caps the quantity imported, usually through import licences; it raises the domestic price like an equivalent tariff.
- Area C becomes a quota rent. If foreign producers capture it, the importing country loses B + C + D; if the government auctions licences, the loss is B + D, like a tariff.
- A voluntary export restraint (VER) is imposed by the exporter, so the quota rent goes to foreign firms: the importing country loses B + C + D.
- An export subsidy pays firms per unit exported; the domestic price rises, consumers lose, producers gain, taxpayers pay, and national welfare falls.
- With a large exporting country, a subsidy also lowers the world price, so part of the subsidy goes to foreigners and the loss is bigger.
- Importers can respond to subsidised imports with countervailing duties.
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