Price Effects of an Import Quota: Small Country

The small country assumption means that the country's imports are a very small share of the world market. So small, that even a complete elimination of imports would have an imperceptible effect upon world demand for the product and thus would not affect the world price. Thus when a quota is implemented by a small country, there is no effect upon the world price.

To depict the price effects of a quota we use an export supply/import demand diagram. The export supply curve is drawn as a horizontal line since the exporting country is willing to supply as much as the importer demands at the world price. From the perspective of the small importing country, it takes the world price as exogenous since it can have no effect upon it.

When the quota is placed on imports, it restricts supply to the domestic market since fewer imports are allowed in. The reduced supply raises the domestic price. The world price is unaffected by the quota and remains at the free trade level. In the final equilibrium two conditions must hold - the same two conditions as in the large country case. Namely,

This implies that in a small country case, the price of the import good in the importing country must rise to the level where import demand is equal to the quota level. Export supply merely falls to the lower level now demanded.

International Trade Theory and Policy - Chapter 90-15: Last Updated on 10/15/00