IB Economics SL & HLTopic 4 — The Global EconomyPaper 1, 2 & 3Core skill~9 min read
Quotas
A quota does not tax imports, it counts them. The government sets a physical limit and, once that limit is reached, no more of the good comes in. The price effect looks a lot like a tariff — but the money ends up somewhere completely different, and that difference is where the marks are.
📚 What you need to know
A quota is a physical limit on the quantity of a good that may be imported in a period.
The limit is set below the free trade level of imports, otherwise it would do nothing.
Restricting cheap imports raises the market price and can create shortages.
Domestic firms supply more at the higher price, so domestic output and employment may rise.
Total quantity traded falls, so consumers buy less and pay more.
The government collects no revenue — the extra money goes to whoever sells the restricted units.
Quotas are often seen as less confrontational than tariffs, which is part of their political appeal.
The quota diagram
Draw the free trade position first. Then add a second domestic supply curve, shifted right by exactly the size of the quota: this is domestic supply plus the permitted imports. Where that new curve meets domestic demand you get the new price and the new total quantity.
The new supply curve is the old one shifted right by the quota, because those imported units are available at every price.
The diagram makes it look as though domestic firms produce up to Q1, stop for a rest while imports arrive, then start again at Q2. That is not how it works in reality — everyone sells at the same time, all year, at the quota price, and the government simply stops further imports once the limit is hit.
Tariff or quota: who ends up with the money?
If a question asks which policy a finance minister would prefer, this is the difference to lead with.
Who is affected
Stakeholder
What happens to them
Domestic producers
Sell more units at a higher price, so revenue and employment in the industry rise
Foreign producers
Sell fewer units, but each one earns the higher quota price, so the loss is softened
Domestic consumers
Pay a higher price for less choice; some leave the market altogether
The government
Gains political support from the protected industry, but collects no tax revenue at all
Downstream producers
Firms using the good as an input face higher costs, which can cost jobs elsewhere
Efficiency
Global efficiency falls, since less efficient domestic output replaces more efficient imports
Worked examples
WORKED EXAMPLE
Consumer expenditure and producer revenue
At the world price of $30 per tonne, domestic firms supply 60 thousand tonnes of steel and consumers demand 180 thousand tonnes. The government imposes a quota of 40 thousand tonnes. The price rises to $50, at which domestic supply is 100 thousand tonnes and demand is 140 thousand tonnes. Calculate the change in (a) consumer expenditure and (b) domestic producer revenue. [4]
(a) Consumer expenditure
before: $30 × 180 = $5,400 thousand
after: $50 × 140 = $7,000 thousandan increase of $1,600 thousand(b) Domestic producer revenue
before: $30 × 60 = $1,800 thousand
after: $50 × 100 = $5,000 thousandan increase of $3,200 thousandCheck the total: domestic 100 plus the quota 40 equals the 140 demanded. If it does not add up, a figure is wrong.
WORKED EXAMPLE
What happens to foreign producers
Using the same figures, calculate the change in foreign producer revenue from this market. [2]
Step 1: imports before the quota180 − 60 = 120 thousand tonnes at $30 = $3,600 thousandStep 2: imports after the quota40 thousand tonnes at $50 = $2,000 thousandStep 3: difference$3,600 − $2,000a fall of $1,600 thousandThey lose, but less than you might expect: the higher price partly cushions the smaller volume.
💡 Exam tip
Shift the domestic supply curve right by the quota, and keep the two curves parallel.
Mark four quantities: domestic supply at Pw, that plus the quota, the new total, and the free trade demand.
State clearly that government revenue is zero. It is the difference examiners are looking for.
Use the check: domestic supply at the new price plus the quota must equal quantity demanded at that price.
Watch the units in a table — tonnes, thousands of tonnes and millions all appear in past papers.
For evaluation, mention shortages and rising prices if domestic firms cannot expand quickly.
⚠ Common mix-up
Treating a quota like a tariff and awarding the government revenue it never receives.
Shifting the demand curve. A quota affects supply, not the willingness of consumers to buy.
Forgetting that the price rises. A quota does not just cut quantity; it lifts the market price too.
Measuring domestic output as 0 to Q1 only. At the new price domestic firms also supply the stretch from Q2 to Q3.
Assuming foreign producers are wiped out. They lose volume but gain a higher price on what they still sell.
Claiming quotas are always gentler than tariffs. They restrict quantity absolutely, which can be harsher.
Up next: Export Subsidies — protection that works from the opposite direction, by making domestic firms cheaper rather than making imports dearer.
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