protectionist-policies-quotas-and-export-subsidies

How a Quota Works

• A quota is a physical limit on imports e.g. in June 2022 the UK extended its quota on steel imports for a further two years in order to protect employment in the domestic steel industry

  • This limit is usually set below the free market level of imports

  • As cheaper imports are limited, a quota raises the market price

  • As cheaper imports are limited, a quota may create shortages

• Some domestic firms benefit as they are able to supply more due to the lower level of imports

  • This may increase the level of employment for domestic firms

How an Export Subsidy Works

• An export subsidy lowers the cost of production for domestic firms 

  • They can increase output and lower prices

  • With lower prices, their goods and services are more competitive internationally

  • If firms are able to meet all of the domestic demand then the excess supply may be exported

  • The increased output may result in increased domestic employment
     

• The export subsidy can be given to the firm by the government using any of the following methods:

  • Direct subsidy payments

  • Tax relief which can be substantial

  • The provision of cheap credit or interest-free government loans
     

• Following the 2nd World War, the European Union subsidised food production and this has continued ever since

  • Once food security had been established within Europe, countries were able to start exporting the excess supply that subsidies generate

Diagram: Impact of Subsidies on Truffles

Diagram analysis

• The domestic market for truffles in the EU was initially in equilibrium at P_wQ₃

  • Domestic firms supplied up to Q₁, while Q₂ – Q₁ was imported into the EU
     

• The implementation of the subsidy lowered firms costs of production, shifting the domestic supply curve from Sd to Sd + subsidy

  • Domestic firms increase output and market share from Q₁ → Q₂

  • Imports reduce from Q₁Q₃ → Q₂Q₃