Question

Show how government policies in international markets, such as quotas and tariffs, impact the prices and quantities of domestic goods and services.

Short answer

Quota and tariff increase the profitability of domestic firms at the expense of foreign producers and also generates additional revenue for the domestic government.

Step-by-step solution

Impact of Quotas

Government imposes a quota to limit the number of products the foreign competitors can sell in the domestic market. Such imposition induces the demand for domestic products by reducing competition in the domestic market. Thus, this process benefits the domestic firms at the expense of foreign producers and increases the revenue generated by the domestic government.

In the above figure, one can visualize that before the quota, the supply of foreign producers was high. But now it has decreased to reduce the quantity supplied. Whereas, after quota, the domestic producer is now producing more than the earlier, thus increasing their profits.

Impact of Tariff

The government also imposes tariffs to reduce the quantity foreign producers sell in the domestic market. In such cases, the foreign producer had to pay the government a lump sum or a per-unit tax to sell its products in the market. Such an act increases domestic producers' profitability at the expense of foreign producers.