When the government of Tradeland decides to impose an import quota on foreign cars, three proposals are suggested: sell the import licences in an auction. Distribute the licences randomly in a lottery. Let people wait in line and distribute the licences on a first-come, first-served basis. Compare the effects of these policies. Which policy do you think has the largest deadweight losses?

Which policy has the smallest deadweight losses? Why?

(Hint: the government’s other ways of raising tax revenue themselves all cause deadweight losses.)