International Trade - Theory and Policy, 2010a

With a tariff in place initially, the increase in domestic demand will leave the domestic price unaffected.
Because this is a small country, the world price does not change and thus the domestic tariff-inclusive
price remains at PT = PFT + T. Domestic supply also remains at ST, but demand rises to D′T, causing an
increase in imports to D′T − ST.
With a quota in place initially, the increase in domestic demand causes the domestic price to rise to PQ in
order to maintain the import level at QT (the higher blue line segment). Domestic supply will rise with the
increase in price (not labeled), while domestic demand will fall.
The protective effect of the tariff or quota means the degree to which the domesticproducers are protected
in the face of the market change. Since the domestic price rises more with the quota in place than with the
tariff, domestic producers will enjoy a larger supply and consequently a higher level of producer surplus
(not shown). Thus the quota is more protective than a tariff in the face of an increase in domestic demand.
An Increase in Domestic Supply
Again, consider a small importing country. In Figure 7.29 "Effects of a Supply Increase", PFT is the free trade
price. If a tariff of T is put into place, the domestic price rises to PT and imports equal DT − ST. A quota set
equal to QT (the blue line segment) would generate the same increase in price to PT and the same level of
imports. Thus the tariff T and quota QT are said to be equivalent to each other.
Figure 7.29 Effects of a Supply Increase
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