International Trade - Theory and Policy, 2010a

Next, consider the effects in this market when there is a decrease in the world free trade price, represented
by a downward shift from PFT to P′FT. The world price could fall because of falling world production costs
or due to improvements in foreign productivity.
With a tariff in place initially, the decrease in the world price will cause a reduction in the domestic price.
Because this is a small country, when the world price falls, the domestic tariff-inclusive price also falls
to P′T = P′FT + T. With the lower price, domestic supply falls to S′T, while domestic demand rises to D′T.
This means that with the tariff in place, imports rise to D′T − S′T.
With a quota in place initially, the decrease in the world free trade price has no effect on the domestic
price. The domestic price remains at PT since this is the only price that will support the quota QT.
Since the domestic price is higher with the quota in place than with the tariff, domestic producers will
enjoy a larger supply (ST vs. S′T) and consequently a higher level of producer surplus (not shown). Thus
the quota is more protective than a tariff in the face of a decrease in the world free trade price.
The General Rule
What we can conclude from the three examples above is that when market conditions change such that
imports increase, a quota is more protective than a tariff. This will occur if domestic demand increases,
domestic supply decreases, the world price falls, or if some combination of these things occur.
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