4.2.2—Quotas

An import quota is a legal quantity limit on imports, so domestic supply plus the permitted imports determines the market outcome.

With fewer imports available, the domestic price rises above the world price. Domestic producers expand, consumers lose surplus, and the scarce import licences create quota rents for whoever controls them.

Separate the quantity limit from a tariff: ask who receives the rent and whether the quota is binding at the world price.

A quota allowing 1,000 bicycles when firms would import 2,000 makes the remaining supply scarce; the price rises and licence holders may earn the difference between domestic and world prices.

A quota and a tariff can reduce imports by similar amounts but distribute rents differently and are not equivalent in every market.