Protectionist Quotas (Edexcel IGCSE Economics)

What is a Quota?

Spec point — 2.2.2c

• A quota is a physical limit on imports

  • E.g. in June 2022, the UK extended their quota on steel imports for a further two years in order to protect employment in the domestic steel industry

• This limit is usually set below the free market level to restrict imports

  • As cheaper imports are limited, a quota may create shortages
  • The shortage raises the market price

• Some domestic firms benefit as they are able to supply more due to the lower level of imports

  • This may increase the level of employment for domestic firms

A quota limits the overall quantity of imported steel supplied to the market, resulting in a shift of the supply curve from S1 → S2

Diagram analysis

• The pre-quota market equilibrium for steel is seen at P₁Q₁

• **After the quota **is imposed, cheaper imports are limited

• As cheaper imports are limited, supply reduces and the supply curve shifts from** S₁** → S₂

• The new market equilibrium is seen at P₂Q₂

  • Following the law of demand, the quantity demanded contracts from Q₁ to Q₂
  • The price increases from P₁ → P₂

• The higher price for steel allows more domestic producers to compete effectively in the market

Exam Hint The effect of a quota is effectively the same as that of a tariff. It reduces the supply in the market and raises the price. The benefit of a tariff is that it raises extra government revenue.

An Evaluation of Quotas

Spec point — 2.2.2c

• The benefits of import quotas include :

  • To meet extra demand, domestic businesses may need to hire more workers, which reduces unemployment and benefits the wider economy

  • The higher prices for the product may encourage new businesses to start up in the industry

  • Countries are able to easily change import quotas as market conditions change

  • Foreign countries view quotas as less confrontational to their business interests than tariffs

    • Their exporters can still sell their goods at a higher price in domestic markets (but a limited amount)

• The disadvantages of import quotas include:

  • Quotas limit the supply of a product and whenever supply is limited, the price of the product rises
  • They may generate tension in the relationship with trading partners
  • Domestic firms may become more inefficient over time as the use of quotas reduces the level of competition