Task: Using an appropriate diagram, explain how the imposition of a quota on the import of cars from would affect

the market for cars in Brazil. (Answer should include a definition of a quota, an explanation of the effect of the quota
on market stakeholders, and make direct references to your diagram.)

Quota- relates to a physical limit on the quantity of a good that can be imported. The government
imposes protectionist policies to protect domestic producers from cheaper prices.

Before the implosion of a quota, Brazil was importing the number of cars equal to (Qdb-Qsb). As
the government sets the quota on the cars equal to Qq, the amount of cars imported will fall
(from Qdb-Qsb to Qq-Qsb). Therefore, there will be a certain amount of people demanding those
cars which are now not sold, so it leads to a shortage (Qdb-Qq). According to the law of supply,
the rice Pw will rise so should the Qsb do. The domestic supply curve will increase (S -> Sq),
because the higher price incentivizes them to produce more cars. As price increases, so,e
consumers will refuse to buy cars, so there will be a new equilibrium with a new Qe1 and Pe1
higher than Pw. The domestic producers now will supply a number of cars from 0 to Qe1 but one
part of it will remain the same (Qq-Qsb) - the quoted amount of cars produced by foreign
businesses and the world supply curve is accordingly limited to Sw1. As a result, there is no
longer a shortage of apples, because the rising price which followed the implosion of the quota
gave domestic fabrics the incentive to produce more cars in Brazil.
Consumers: There is a decrease in consumer surplus caused by higher prices and less quantity
supplied. Represented by a triangle (EAPe1)
 Domestic producers: There is an increase in producer surplus due to higher prices and a greater
domestic quantity supplied. There are two blue areas representing domestic surplus which are
interrupted by the area of quota.
Foreign producers: The foreign revenue will rise as the price rises. It is represented by a purple
rectangle (Pe1*Sw). Therefore, the impact of quota on foreign producers is mixed: less quantity
will be imported but foreign producers who can report will benefit from increased price.
Government: No impact since there is no revenue generated by quota.
Total welfare: There is a loss of total welfare resulting from the imposition of a quota (since
there is an intervention without externality) which is represented by the domestic consumers who
would not afford expensive cars. It is represented by the black area on the diagram. Also, the
upper part (above the S) of a foreign producer's revenue may be described as a loss because this
revenue was transferred from domestic producers to foreign ones as a result of the increased
price. In general, the impact on total welfare is negative because the decrease in consumer
surplus will exceed the producer surplus. Moreover. There is no government welfare so there is
no possibility to invest money in car production in the form of subsidy. To sum up, the
imposition of a quota has a less harmful impact on foreign producers than a tariff.