A small country imports T-shirts. With free trade at a world price of $10, domestic production is 10 million T-shirts and domestic consumption is 42 million T-shirts. The country's government now decides to impose a quota to limit T-shirt imports to 20 million per year. With the import quota in place, the domestic price rises to $12 per T-shirt and domestic production rises to 15 million T-shirts per year. The quota on T-shirts causes domestic consumers to:

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With the quota, the price of T-shirts increases from $10 to $12, leading to a loss for consumers. Before the quota, consumers paid $10 for each of the 42 million T-shirts, totaling $420 million. After the quota, they pay $12 for each of the 35 million T-shirts (15 million produced domestically plus 20 million imported), totaling $420 million for the 35 million T-shirts, which is $420 million. The increase in cost for the 35 million T-shirts is $70 million (from $350 million at $10 each to $420 million at $12 each). Additionally, consumers lose the consumer surplus on the 7 million T-shirts they no longer buy due to the quota, valued at $10 each, totaling $70 million in direct costs plus $7 million for the lost T-shirts, equaling a total loss of $77 million.

A Small Country Imports T-Shirts