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This diagram illustrates the effects of an import quota, a trade protection measure that limits the quantity of a good that can be imported. Quotas raise domestic prices, benefit local producers, and reduce consumer surplus.
Dd: Domestic demand curve for the good.
Sd: Original domestic supply curve.
Sd + Quota: Effective supply curve after the quota is imposed.
Pw: World price under free trade.
Pq: Higher domestic price after quota imposition.
Q1: Quantity supplied domestically under free trade.
Q2: Quantity supplied domestically with quota.
Q3: Quantity demanded with quota.
Q4: Quantity demanded under free trade.
Imports without quota: Q4 - Q1.
Imports with quota: Q3 - Q2.
Welfare Loss: Two shaded areas representing the inefficiencies due to higher-cost domestic production and lower consumer satisfaction.
Under free trade, the world price (Pw) allows for higher imports (Q4 - Q1), benefiting consumers with lower prices and greater quantity.
A quota restricts imports to a lower quantity (Q3 - Q2), reducing overall supply in the domestic market and raising the price to Pq.
Domestic producers increase supply from Q1 to Q2, and consumers reduce demand from Q4 to Q3 due to the higher price.
The import quota benefits domestic firms but creates a welfare loss, shown by two shaded triangles, due to inefficient production and reduced consumption.
Unlike a tariff, quotas do not generate government revenue unless auctioned; instead, quota rents may go to foreign producers or importing firms.
Explore other diagrams from the same unit to deepen your understanding
This diagram shows how a country exports goods under free trade when the world price is higher than the domestic equilibrium price.
This diagram illustrates how a country imports goods under free trade when the world price is lower than the domestic equilibrium price.
This diagram shows the effects of a tariff imposed on imported goods. A tariff raises the price of imports, protecting domestic producers but creating welfare losses.
This diagram illustrates the effects of a production subsidy, where the government supports domestic producers to lower their costs and increase output. It is a form of protectionism without raising consumer prices directly.
This diagram shows how an export subsidy raises the domestic price above the world price, encouraging producers to export more while reducing consumer welfare and creating deadweight losses.
This diagram uses production possibility curves (PPCs) for two countries—Grania and Chipia—to illustrate absolute and comparative advantage and the potential gains from trade.
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