Figure 5.3. Sweden's Apple Market
-Consider Figure 5.3.Assume that Swedish import companies behave as monopoly buyers while foreign export companies behave as competitive sellers.Compared to free trade, Sweden's import quota results in domestic welfare

Question

Figure 5.3. Sweden's Apple Market 
-Consider Figure 5.3.Assume that Swedish import companies behave as monopoly buyers while foreign export companies behave as competitive sellers.Compared to free trade, Sweden's import quota results in domestic welfare

Quizplus · Accepted Answer

With free trade, the domestic consumer surplus is the area above the world price and below the demand curve, which is $5.60-$3.00=$2.60. The domestic producer surplus is zero. With the import quota, the domestic price increases to $4.00, which reduces the quantity demanded to 4 million apples and increases the quantity supplied to 6 million apples. The imports are thus reduced from 5 million apples to 2 million apples. The domestic consumer surplus is now the triangular area above the world price, below the demand curve, and to the left of the new quantity demanded, which is $4.80-$4.00=$0.80. The domestic producer surplus is the rectangular area below the world price, above the domestic price, and to the right of the new quantity supplied, which is ($4.00-$3.00)*6=$6.00. The total gains from trade are the sum of the consumer and producer surpluses under free trade, which is $2.60+0=$2.60, and the gains from the quota, which is $0.80+$6.00=$6.80. However, the quota also generates deadweight loss, which is the triangular area between the supply and demand curves and to the right of the new quantity demanded, which is ($4.00-$3.80)*(6-4)/2=$0.40. Therefore, the net welfare loss from the import quota is $6.80-$0.40=$6.40.