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

Aquota is a government restriction that limits the quantity of imported goods that can legally enter the country.

Implications:

• Reduces competition in domestic market.
• Higher domestic prices.
• Higher profits for domestic firms.
• Lower consumer surplus for domestic consumers.

Conclusion: Domestic producers benefit at the expense of domestic consumers and foreign producers.

The Impact of a Foreign Import Quota on the Domestic Market (Figure M7-1) Price SF Quota W WES SForeign SDomestic SQuota E Market supply PD after quota pQuota M SF+D PF+D K Market supply before quota A Deadweight loss G B due to quota Demand Quota Q Quota OF+D Quantity in the domestic market