Which of the following will result in the short run if the government imposes a binding quota?

Question

BlackTom AI · Accepted Answer

A binding quota restricts the imported quantity below the free-market level, so total market quantity falls below the equilibrium and price rises.

1) Relevant concepts
- Market equilibrium: intersection of demand and supply maximizes total surplus (consumer + producer).
- Binding quota: a legal limit on imports that is less than the market would import at free-trade equilibrium; it reduces total quantity traded.
- Surplus and deadweight loss (DWL): reduction in total surplus from trades that no longer occur because of the quota. DWL represents lost gains from mutually beneficial transactions.

2) Step-by-step reasoning
- Under free trade (or free market), equilibrium quantity Q* and price P* clear the market.
- Imposing a binding quota reduces quantity to Qq < Q*. To clear the market at Qq, the domestic price must rise to Pq (the price at which domestic producers plus allowed imports supply Qq).
- Consumers pay a higher price and buy less — consumer surplus falls.
- Domestic producers may receive a higher price and expand output, so producer surplus can rise somewhat.
- The quota creates quota rents (the difference between world price and domestic price times the import quantity) that accrue to whoever holds import licenses; these rents are not necessarily government revenue unless licenses are auctioned.
- Because some trades between Qq and Q* no longer occur, the economy loses the net gains from those transactions. These lost gains form deadweight loss: two triangular areas on a standard supply-demand diagram representing forgone consumer and producer surplus.

3) Intermediate/calculation illustration (conceptual)
- For linear curves, DWL = 0.5 * (price increase due to quota) * (Q* - Qq) + 0.5 * (difference in marginal supply) * (Q* - Qq) — i.e., area of the triangles representing lost mutually beneficial trades. The exact numeric area depends on demand and supply slopes.

4) Why the correct answer is correct
- A binding quota reduces traded quantity below the efficient level, preventing mutually beneficial trades and thus creating DWL. This is the standard welfare result for quantity restrictions.

5) Why other likely choices are incorrect
- "Government revenue increases": not necessarily — quota rents accrue to license holders unless the government auctions licenses. So government revenue may be zero.
- "No welfare change": incorrect because total surplus falls (lost trades).
- "Consumers unaffected": incorrect — consumers pay higher prices and lose surplus.

Conclusion: Imposing a binding quota in the short run causes a deadweight loss, which matches the provided correct answer.

Which of the following will result in the short run if the government imposes a binding quota?单项选择题

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