Import Quotas

Another form of government interference with international trade. Import quotas set a limit on how many units can be imported. For example a 100,000 vehicle quota: Japanese producers would only be allowed to sell 100,000 cars in the U.S. market. After the quota is reached, it would be illegal for any more Japanese cars to cross into the U.S. for sale.

Import quotas are probably even more dangerous than tariffs, because it is not as obvious how much damage they cause to the pure market outcome. For example, under a tariff rate of 50%, it is quite visible how much the government is penalizing foreign producers and rewarding U.S. producers. But if the government simply imposes an import quote, it is not as easy to see how much the distorted pattern of production differs from the pure-market outcome.

If the foreign producers came up with innovations that allowed them to lower prices, then American consumers would still benefit if there was a tariff in place, because the post-tariff price would fall. But with a rigid import quota, American consumers would not benefit nearly as much from cost-cutting foreign innovations.

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