What are the various effects of the fixation of quota of an imported commodity?

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Various effects of the fixation of quota of an imported commodity are explained below:

1. Price Effect:

When the quota of an imported com­modity is fixed, its imports fall and price rises. The actual effect of quota on price will depend upon the elasticity of demand and supply. In Figure 6, DD and SS are demand and supply curves.

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Under free trade, the price of the com­modity is 0P1. At this price, the domestic demand for the commodity is QQ2, but the domestic supply is OQ1.

Thus, Q,Q, amount is imported. When import quota is imposed, the imports are reduced and fixed at Q3Q4 amount. As a result of reduction in imports from Q1Q2 to Q3Q4, the imports price rises from OP1 to OP2 Thus P1P2 is the price effect.

2. Protective Effect:

Fixation of import quota leads to the reduction in imports and increase in import price. This increases the domestic production and gives the home producers protection against foreign competition. When Q304 import quota is fixed, domestic production increases from OQ1 to 0Q3. Thus, Q1Q3 is the protective effect of the import quota.

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3. Consumption Effect:

When import price rises on account of the import quota, domestic consumption and hence the welfare declines. An import quota of Q3Q4 raises the price from OP1 to OP2 and reduces the domestic consumption form QQ2 to 0Q4. In this case, Q4Q2 decline in consumption is the consumption effect of the import quota.

4. Revenue Effect:

The revenue effect of import quota is uncertain. The fixation of import quota (Q3Q4) raises the import price (by P1 P2) and therefore yields revenue (P1P2 x 0304 = KLMN) which may go the government or may be divided among the domestic importers and foreign exporters.

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The division of revenue among importers and exporters depends upon the market structures prevailing among these two groups:

(a) If the government auctions the import licenses, this revenue will be, like the tariff revenue, earned by the government,

(b) If the foreign supply is perfectly elastic (as is assumed in Figure 6), and if the government does not sell licenses, then the revenue will go to the importers,

(c) If the government does not sell license, but the exporters are able to raise delivered prices, then the revenue will be taken away by the exporters.

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5. Redistributive Effect:

Import quota also has distributive effect by transferring real income from the consumers to the producers. The rise in price (from OP1 to OP2) as a result of import quota leads to the loss of consumer surplus as represented by P1 P2 LT.

Of this total consumer surplus, P1P2 KR amount is the redistributive effect because it is earned by the producers as profit.

The loss of consumer surplus as represented by the areas KRM and LNT are considered the cost of the quota in terms of decreased productive efficiency and consumer satisfaction respectively.

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6. Terms of Trade Effect:

Imposition of import quota generally results in a change in terms of trade in favour of the quota- fixing country.

The gain from the imposition of quota can be measured (in terms of wheat) as the quantity W1W2 It is not certain how this gain will be distributed:

(a) If there is competitive bidding for import licenses, this gain will go the government,

(b) If the exporters in the foreign country and the home importers compete freely among themselves, this gain will go to the foreign exporters,

(c) If there is collision among the importers and exporters compete freely, the home importers will capture the gain,

(d) if there is collusion among both exporters and importers, the distribution of gain will depend upon the relative bargaining strength of the two parties.

7. Balance of Payment Effect:

Quotas restrict imports and thus help in correcting the adverse balance of payments. In this regard, quota is more effective than tariff because the former has direct impact on chacking imports.

8. Income Effect:

Quota is also superior to tariff in its impact on income and employment. Quota reduces imports without leakages. The money thus saved can be spent on domestically produced goods. This will increase income and employment in the country.

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