IB Economics SLTopic 4 — The Global EconomyPaper 2Diagram skill~10 min read
Tariffs and Quotas
Tariffs and quotas are the two blunt instruments of protectionism. One taxes imports, the other caps them. They can end up producing exactly the same price and the same quantity, and still leave the country in different positions, because of one question: who keeps the money.
📘 What you need to know
Protectionism is any government action that limits free trade: tariffs, quotas, subsidies or administrative barriers.
A tariff is a tax on imported goods. It raises the price inside the country by the size of the tariff.
A quota is a physical limit on the quantity that may be imported, usually set below the free trade level.
Both raise the domestic price, raise domestic output, cut imports and cut the quantity consumers buy.
A tariff gives the government tax revenue. A quota gives that same amount to whoever holds the import licences, which is often the foreign supplier.
Both create a welfare loss: inefficient domestic firms produce more, and some consumers are priced out.
Marks come from reading the areas correctly, so learn the diagram as areas, not as a picture.
The tariff diagram
Start from free trade at the world price of $20, where domestic firms supply 40 and consumers buy 120, so 80 is imported. Now put a $5 tariff on every imported tonne. Importers must charge $25 to cover the tax, so the price inside the country rises to $25 and the whole market moves.
Learn the four areas by what they do, not by their letters: one is a transfer to producers, one is a transfer to the government, and two are losses that simply disappear.
Area
What it is
Value here
A
Gain in domestic producer surplus
$250,000
B
Welfare loss: inefficient home firms replace cheaper imports
$50,000
C
Government tariff revenue
$200,000
D
Welfare loss: consumers priced out of the market
$50,000
A+B+C+D
Fall in consumer surplus
$550,000
B+D
Net welfare loss to the country
$100,000
WORKED EXAMPLE
Using the diagram, calculate the government’s tariff revenue and the change in imports. [4]
Step 1: imports before the tariff120,000 − 40,000 = 80,000 tonnesStep 2: imports after the tariff100,000 − 60,000 = 40,000 tonnes so imports have halved.
Step 3: revenue is the tariff per unit × the units still imported$5 × 40,000 = $200,000Revenue $200,000; imports fall by 40,000 tonnesThe tariff is charged only on imports, so multiply by 40,000, not by the 100,000 that consumers buy.
The single most common tariff mistake is multiplying the tariff by total consumption. The government collects nothing from wheat grown at home, so area C stretches only across the imported quantity.
The quota diagram
Now instead of a tax, the government says only 40,000 tonnes may be imported. Above the world price, the supply available to the country becomes domestic supply plus that fixed 40,000, which is the domestic supply curve shifted right by the size of the quota. Where that new curve meets domestic demand, you get the new price.
Domestic firms supply 60,000 tonnes and importers bring in the 40,000 they are allowed. Because those 40,000 tonnes now sell for $25 but still cost $20 to obtain, the extra $5 a tonne is pure rent for whoever holds the licence.
WORKED EXAMPLE
Calculate the change in consumer expenditure caused by the quota, and state who gains the shaded area. [4]
Step 1: spending before the quota$20 × 120,000 = $2,400,000Step 2: spending after the quota$25 × 100,000 = $2,500,000Step 3: the difference$2,500,000 − $2,400,000 = $100,000Spending rises by $100,000 for less wheatThe shaded $200,000 goes to the holders of the import licences. Under a tariff that same money would have been government revenue.
Same outcome, different pockets
Here is the comparison worth memorising, because it is the strongest evaluation point in any question on protection methods.
Stakeholder
Under the $5 tariff
Under the 40,000 tonne quota
Domestic consumers
Pay $25, buy 100,000
Pay $25, buy 100,000
Domestic producers
Revenue rises from $800,000 to $1.5m
Revenue rises from $800,000 to $1.5m
Foreign producers
Receive $20 a tonne on 40,000 = $800,000
Receive $25 a tonne on 40,000 = $1m
The government
Collects $200,000 in tariff revenue
Collects nothing
Downstream firms
Pay more for wheat as an input
Pay more for wheat as an input
Society
Welfare loss of $100,000
Welfare loss of $100,000, plus the rent leaving the country
Why choose a quota at all? It is more predictable, since the government knows exactly how much will come in, and it is less confrontational than a tax, so trading partners are less likely to retaliate. The price for that is the lost revenue.
🧩 Drawing either diagram under exam pressure
Draw Sd and Dd and mark the no-trade equilibrium lightly.
Add the world price as a horizontal line below it, and mark Qs and Qd on that line.
Add the second price line (world price plus tariff), or shift Sd right by the quota.
Mark the four new quantities and drop dashed lines to the axis.
Shade and name the areas you are going to talk about, then refer to them by name in the writing.
💡 Exam tip
Tariff revenue is the rectangle over the imported quantity only. Its height is the tariff, its width is what is still imported.
The two triangles are the welfare loss. One is production inefficiency, one is lost consumption. Name both.
For a quota, shift the supply curve, do not draw a second price line. The price comes out of the new intersection.
Say who gains the quota rent. Most students never mention it, and it is the difference between the two policies.
Bring in downstream firms. A tariff on steel protects steelmakers and taxes every firm that uses steel.
Check your arithmetic against the diagram, since Paper 2 calculation marks come from reading it correctly first.
⚠️ Common mix-up
Multiplying the tariff by total consumption. Home-grown output is not taxed.
Thinking a quota raises government revenue. It does not, unless the licences are auctioned.
Shifting demand instead of supply for a quota. Demand does not move; the supply available to the market does.
Calling the whole loss of consumer surplus a welfare loss. Most of it is transferred to producers and the government, not lost.
Saying protection “saves jobs” with no counting. Jobs saved in one industry can be outnumbered by jobs lost downstream.
Forgetting the price rise applies to domestic output too. Home producers sell all their tonnes at $25, not just the extra ones.
Up next: Subsidies and Administrative Barriers — the two forms of protection that do not look like protection, which is exactly why governments like them.
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