Download Tutorial on Partial Equilibrium Modeling: The Case of an

Tutorial on Partial Equilibrium Modeling:
Export Quota by a Large Country
Exporter
The Microeconomics of International Trade
ECN 230
Roberto J. Garcia
School of Economics and Business, UMB
Economic effects of an export quota
Export quota
An export quota is a trade policy instrument that
aims to limit directly the traded volume between
countries, e.g., setting the quantity exported,
[QX]1, equal to a targeted volume traded, Qq.
By limiting the quantity exported, a quota has
implications for prices, which affects economic
behavior and welfare. The economic effects are
studied by analyzing the change in prices on:
Production, consumption and trade patterns, and
Producer and consumer welfare and the ability to earn
quota rents by governments and/or firms.
A quota requires additional administrative (e.g.,
customs) measures to ensure that [QX]1  Qq.
2
Economic effects of an export quota
Political administration of a quota
An important feature of a quota is the how rents
are shared between producers and governments.
The administration of a quota is a key determinant
for how quota rents are collected and allocated.
This depends on how a government issues export
licenses (on a first come, first serve basis; through
a competitive auction; applying a fixed fee, etc).
The objectives of a quota are numerous, but rents
are an important consideration. If a government
was interested in collecting rents, one should ask
why an export tax is not applied instead of a quota
because a tax is administratively more easily.
Hence, the rents are often a means of "bribing"
traders in exchange for limiting trade volume.
3
Economic effects of an export quota
Market analysis
Analyzing the production, consumption and trade
effects: the perspective of the exporting country
World market
PW
Exporter's domestic market
P
ES1
D
ES
[PW]1
S
[PW]1
PW
PW
[PD]1
ED
[QX]1 [QT]0

QT
[QD]0 [QD]1 [QS]1 [QS]0


Q
4
Economic effects of an export quota
Economic intuition and expectations
Regardless of the reason for a quota being implemented,
the result is a reduction in the quantity exported, such that
the volume is  [QX]1. (Graphically, ES1 is kinked,
becoming vertical at [QX]1 and intersects ED at [PW]1.)
• The world price increases (PW) because a large seller on the
international market reduces supply, i.e., a TOT effect.
• The internal price in the exporter's market decreases (PD) because
there is a greater volume of the good on the domestic market.
Producers and consumers in the exporting country react to
a change in the domestic price, from PW to [PD]1.
• Producers respond to price decreases by decreasing output, QS.
• In partial equilibrium analysis, a price decrease is expected to
result in an increase in consumption, QD.
Quota rents can be collected. Who collects the rents
depends on how the quota is implemented.
5
Economic effects of an export quota
Welfare analysis
Analyzing economic costs and income transfers
among producers, consumers, traders and the
government: the exporting country's perspective
Exporter's market
Welfare analysis
Δ CS
+(a)
D
Δ PS
ΔG
P
S
[PW]1
e
PW
[PD]1
- (a+b+c+d)
+ (c+e)
Δ NSW - (b+d) + (e)
a
b c
d
[QD]0 [QD]1[QS]1[QS]0
Q
Assumes the exportcountry's government
earns the quota rents.
6
Economic effects of an export quota
Economic interpretation of welfare areas
Area 'a' represents the value gained by consumers from
the lower price; it is an income transfer from producers
to consumers.
Area 'b' represents a part of the total value lost by the
producers that is not transferred to any other economic
agent in the economy; it is a "dead-weight loss" (DWL)
in consumption.
• The DWL in consumption is the cost to society of consuming
more of the exportable good at distorted prices and becoming
less reliant on trade in the process.
• The increased expenditures on the product reflects a
misallocation of resources (ie, a non-optimal consumption mix).
Area 'c' represents a value lost by producers, making up
part of the quota rents; if government sold export
licenses at the market rate, then 'c' is paid by an exporter
to the government and is an income transfer.
7
Economic effects of an export quota
Area 'd' represents part of the value lost by producers
that is not transferred to any other economic agent; it is
a "dead-weight loss" (DWL) in production.
• The DWL in production is the cost to society of producing less
of the good in which the country has a comparative advantage.
• The decreased production results in a misallocation of
resources in production and trade as a result of distorted prices.
Area 'e' represents quota rents that are collected along
with area 'c'; the total rents are (c+e) which is equal to
{[PW]1 – [PD]1} · {[QX]1}; however, 'e' is a transfer of
income from import-country consumers to the
exporting country resulting from the quota's TOT
effect, i.e., the policy-induced reduction in supply by a
large international seller, raising world price to [PW]1.
The net effect of the quota on the exporter is uncertain
because the negative DWLs can be offset by the income
transfer from the importing country. It will also depend
8
on quota administration and rent collection.
Economic effects of an export quota
Market analysis
Analyzing the production, consumption and trade
effects: the perspective of the importing country
Importer's domestic market
P
S
World market
PW
[PW]1
[PW]1
PW
PW
ES1
ES
[PD]1
ED
D
[QS]0 [QS]1 [QD]1 [QD]0


Q
[QX]1 [QT]0

QT
9
Economic effects of an export quota
Economic intuition and expectations
The application of a quota by an exporter results in a
reduction in the quantity exported. (Graphically, the
new ES is vertical at the targeted level of export, [QX]1).
It is assumed that the importing county's government
has not taken any policy action to counter the quota.
• The world price increases (PW) because a large seller on the
international market reduces supply.
• The internal price in the importer's market is the world price
because no policy action has been taken.
Producers and consumers react to the change in the
domestic price, from PW to [PW]1.
• Producers respond to price increases by increasing output, QS.
• In partial equilibrium analysis, a price increase is expected to
result in a decrease in consumption, QD.
If there is no counteraction taken by the importcountry's government, then there are no budgetary
outlays or rents/taxes collected from imported goods.
10
Economic effects of an export quota
Welfare analysis
Analyzing economic costs and income transfers
among producers, consumers, traders and the
government: the importing country's perspective
Importer's market
Welfare analysis
- (1+2+3+4)
Δ CS
S
P
Δ PS
ΔG
[PW]1
PW
1
2
3 4
Δ NSW
D
[QS]0 [QS]1[QD]1[QD]0
Q
+ (1)
0
- (2+3+4)
Assumes the exporting
country's government
collects all quota rents
11
Economic effects of an export quota
Economic interpretation of welfare areas
Area '1' represents the value gained by producers from
the higher price; it is an income transfer from
consumers to producers.
Area '2' represents a part of the total value lost by the
consumer that is not transferred to any other economic
agent in the economy; it is a "dead-weight loss" (DWL)
in production.
• The DWL in production is the cost to society of producing
more of the importable good and becoming less reliant on trade
to produce more of the good in which the country has a
comparative disadvantage.
• The increased production reflects a misallocation of resources
because the world price has been distorted.
Area '3' represents the value lost by consumers that is
gained by the export-country's government; it is an
international income transfer, a result of a TOT effect.
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Economic effects of an export quota
Area '4' represents a part of the value lost by consumers
that is not transferred to any other economic agent in
the economy; it is the "dead-weight loss" (DWL) in
consumption.
• The DWL in consumption in the importing country is the cost
to society of consuming too little of the importable good as a
result of distorted prices.
• The decreased expenditures reflects a misallocation of
resources (ie, a non-optimal consumption mix).
The net effect of the export quota, administered by the
government of the exporting country, on the importing
country is negative, resulting in DWLs and an income
transfer to the exporting country. An export quota that
is administered differently to the scenario in this
example can result in a much different net welfare
effect because the rents can shared by exporting firms,
and the governments of both countries.
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Economic effects of an export quota
Net world welfare effects
Internal domestic transfers,
DWLs and international transfers
Δ NSW
Importer
Importer's market
P
Exporter's market
Exporter
P
S
D
4
[PW]1
PW
S
[PW]1
1 2 3
e
PW
[PD]1
a
d
World
b c
- (2+4)
- (3)
- (b+d)
+ (e)
(e) = (3)
- (b+d)
- (2+4)
D
[QS]0 [QS]1[QD]1[QD]0
Q
[QD]0 [QD]1[QS]1 [QS]0
Q
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Economic effects of an export quota
Concluding comments
The export quota by a large country results in a TOT effect
that affects importers and exporters differently:
1. An increase in the world price benefits the exporting
country(ies) at the expense of importing countries.
2. The lower domestic price in the exporting country is an income
transfer to domestic consumers from domestic producers.
3. If quota rents go to the exporting country, then the higher world
price is a tax on importing country consumers who cross-subsidize
exporting country consumers. Rents are collected by the producer/
exporters if the government distributes export licenses to its firms
for free, or are shared by government and firms if a fee is charged
that is less than the per unit value of a license, i.e., [PW]1 - [PD].
4. The net effect of the quota on the world economy is an income
transfer and DWLs in production and consumption in both the
importing and exporting countries because prices have been
distorted. This is the case regardless of which economic agent
collects the quota rents and how the quota is administered.
5. Import quotas are often administered as export quotas to allow
exporters to collect rents in exchange for export limits, i.e., a VER.