Some domestic producers want the government to place a quota or tariffs on imports to combat the competition from free-trade.
- A quota limits the number of foreign products brought into a country.
- A tariff is a tax on any foreign product sold domestically.
A tariff or quota has the effect of increasing the price from Pw to Pt. By following the Pt line across, you will see that domestic suppliers can now increase their production. From Qwd to Qtd, continue to follow the Pt price you will see domestic consumers will now decrease their purchases from Qw to Qt. Foreign producers will import the differences from Qt to Qtd.
The winners with a tariff or quota are domestic producers; the losers are domestic consumers and foreign producers.
- Domestic consumers will now pay more for less of a product.
- Producers will lose because they are limited in the amount of money they can earn.
In this, we see the consumer surplus with a tariff or quota has decreased while the domestic producer surplus has increased. The shaded region is the revenue earned by foreign companies when was tariff or quota is in place and it now limited to only this area.
