Quotas and tariffs

There are two types of protection; Tariffs, which are taxes, or duties, on imported goods designed to raise the price to the level of, or above the existing domestic price, and non-tariff barriers, which include all other barriers, such as:

Quotas

A quota is a limit to the quantity coming into a country.

With no trade, equilibrium market price in the country will exist at the price which equates domestic demand and domestic supply, at P, and with output at Q. However, the world price is likely to be lower, at P1, than the price in a country that does not trade. If the country is opened up to free trade from the rest of the world, the world supply curve will be perfectly elastic at the world price, P1.

The new equilibrium price is P1 and output is Q1. The domestic share of output is now Q2,compared with Q, the self-sufficient quantity. The amount imported is the distance Q2 to Q1.

Imposing a quota

In an attempt to protect domestic producers, a quota of Q2 to Q3 may be imposed on imports.

This enables the domestic share of output to rise to 0 to Q2, plus Q3 to Q4.