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Net Welfare Loss From an Import Quota

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1. (Reasons for international specialization) What determines which goods a country produce and export?

2. (Import quotas) How low must a quota be in effect to have an impact? Using a demand-and-supply diagram, illustrate and explain the net welfare loss from imposing such a quota.

3. Under what circumstances would the net welfare loss from an import quota exceed the net welfare loss from an equivalent tariff (one that results in the same price and import level as the quota)?

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Solution Preview

1. Countries should produce and export goods in which they have a comparative advantage, i.e. that they can produce at a lower opportunity cost than other countries.

2. To be effective, a quota must be set below the quantity of a good that would be imported if there were ...

Solution Summary

How a country determines which goods it should export, and the net welfare loss arising from an import quota. Illustrated with a diagram.