Question

China's entry into the World Trade Organization (WTO) in 2001 created more competition between local and foreign firms, and also provided China greater access to the market for exports. This was particularly true in the market for rubber since, at the time, China was the world's second largest consumer of rubber (China is now the world's largest consumer of rubber). Shortly after joining the WTO, China eliminated its import quota on rubber. What impact do you think the import quota reduction likely had on the price of rubber and the quantity of rubber exchanged in China? What implications do you think the elimination of the quota on rubber had on China's social welfare?

Short answer

Even though the elimination of quota has increased consumer surplus and decreased producer surplus, with no DWL the social welfare is now on a higher level.

Step-by-step solution

Quota

The quota is a form of restriction on trade. The government imposes quota on import of certain products for the benefit of the home economy.

Explanation the eliminating quota

After the elimination of the import quota, the price of rubber in China has gone down and the exchanged quantity has increased. In short, eliminating quota $�\downarrow P\uparrow Q$

As the price went down after eliminating the quota, social welfare increased. Now, on the market with no quota, price and quantity are set on a socially efficient level that eliminates deadweight loss. Even though the elimination of quota has increased consumer surplus and decreased producer surplus, with no DWL, social welfare is now on a higher level.