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. How much would the importing nation lose if the government used VER instead of import quota?

Question

Quizplus · Accepted Answer

The importing nation would lose $52 million if the government used VER instead of import quota. This is because with a VER, the government would have to purchase import licenses from foreign producers, which would cost the government $12 per license. With an import quota, the government does not have to purchase import licenses, so it would not lose any money.

A Small Country Imports T-Shirts