ECONOMICS
BARRIERS TO TRADE
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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It lowers prices slightly
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It raises prices dramatically
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It keep prices from dropping
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It keeps prices from rising
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Detailed explanation-1: -In general, what effect does a quota have on the prices of comparable goods in the domestic market? It keep prices from dropping.
Detailed explanation-2: -Quotas restrict market access to imported products. The result is usually an increase in the domestic price paid by consumers. This leads to a fall in consumer surplus and lower real incomes. It can also cause a reduction in the amount of choice that consumers have in a market.
Detailed explanation-3: -Since the domestic price rises more with the quota in place than with the tariff, domestic producers will enjoy a larger supply and consequently a higher level of producer surplus (not shown). Thus the quota is more protective than a tariff in the face of an increase in domestic demand.
Detailed explanation-4: -Quotas cause an increase in the price of the good, which eats away at the cost competitiveness of the foreign supplier. We can also see how a system like this is harmful to consumers, as it restricts the number of alternatives available to them and forces them to pay higher prices for certain goods.