Principles of Macroeconomics / Unit 17 MAC 1618 worked example, 60 to 90 seconds
A Quota Smaller Than the Flow
The idea
Impose a quota below the free-trade quantity and find the resulting price in both countries. The quota forces the two markets apart again, so each returns partway toward its own autarky price. Find the importer's price where its excess demand equals the quota, and the exporter's where its excess supply equals the quota.
In practice
The free-trade flow was 60 units at a price of 40 in both countries. Now cap imports at 30. In the importing country, excess demand falls to 30 at a price of 50, where quantity demanded is 85 and quantity supplied is 55. In the exporting country, excess supply falls to 30 at a price of 30, where quantity supplied is 70 and quantity demanded is 40. So the importer's price rises to 50 and the exporter's falls to 30, and the twenty-point gap between them is exactly what the quota created.
Where people slip
Look at who gained. The importing country's consumers pay more and its producers gain. But the exporting country's producers now receive 50 rather than 40 on the units they are still allowed to ship, so part of the importing consumers' loss ends up with foreign producers rather than with the domestic ones the quota was meant to help. A tariff would at least have collected that as revenue.
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