Price S1 (Quota)
Q1 Qx Quantity
The difference between what the producers are able and willing to supply with what they actually supply refers to producer surplus. Consumer surplus, on the other hand, is the difference between the price the consumers are able and willing to pay and the price they pay (Mankiw, 2014 p. 135). In a free trade market, the equilibrium price and quantity will be PX and QX as shown in the diagram above. In this scenario, the consumer surplus will be the area under EDPX, and the producer surplus will be the area under ECPX.
In a quota system, the government controls the supply in its aim to maintain a certain market price (Mankiw, 2014 p. 140). In the diagram above, the government sets a supply amount Q1. This, in turn, raises the market price to P1. After the quota is imposed, the consumer surplus changes to the area under ADP1 and the producer surplus changes to AP1CB. This produces a net deadweight loss represented by the area under ABE.
As observed from the diagram the quota favours the suppliers by increasing the supplier surplus and reducing the consumer surplus. It creates a cost to the society equal to the deadweight loss. It reduces the total economic welfare.
It is a bad idea to impose trade barriers on the imports of a country with poor labour standards. A country with poor working conditions is inefficient leading to high costs of production. Imposing restrictions on imports will force the international companies to shift their operations to other countries where producing goods is cheaper (Mankiw, 2014 p. 172). This, in turn, increases the unemployment rates in the country imposing barriers. Increased trading between a state with poor working standards and a country with high working standards will improve the working standards in both countries.
Mankiw, N.G., (2014). Principles of Microeconomics.7th ed. USA: Cengage Learning.
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