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. If the government auctions the import licenses, the national well-being will _____ by _____.

Question

Quizplus · Accepted Answer

The quota raises the domestic price, reducing consumer surplus and increasing producer surplus. The auction revenue from import licenses is a transfer, not a net gain. The net welfare loss is the deadweight loss from reduced consumption and inefficient production, totaling $12 million.

A Small Country Imports T-Shirts