Protectionist Policies: Quotas & Export Subsidies (AQA A Level Economics)

• A quota is a physical limit on imports e.g. in June 2022 the UK extended its quota on steel imports for a further two years in order to protect employment in the domestic steel industry
  
• This limit is usually set below the free market level of imports
• As cheaper imports are limited, a quota raises the market price
• As cheaper imports are limited, a quota may create shortages
  
  
• Some domestic firms benefit as they are able to supply more due to the lower level of imports
• This may increase the level of employment for domestic firms

• An export subsidy lowers the cost of production for domestic firms 
  • They can increase output and lower prices
  • With lower prices, their goods and services are more competitive internationally
  • If firms are able to meet all of the domestic demand then the excess supply may be exported
  • The increased output may result in increased domestic employment
     
• The export subsidy can be given to the firm by the government using any of the following methods:
  • Direct subsidy payments
  • Tax relief which can be substantial
  • The provision of cheap credit or interest-free government loans
     
• Following the 2nd World War, the European Union subsidised food production and this has continued ever since
  • Once food security had been established within Europe, countries were able to start exporting the excess supply that subsidies generate

Diagram: Impact of Subsidies on Truffles

European Union subsidies for truffle producers shift the domestic supply curve to the right, which decreases the level of truffle imports required from Q₁Q₃ to Q₂Q₃

Diagram analysis

• The domestic market for truffles in the EU was initially in equilibrium at P_wQ₃
• Domestic firms supplied up to Q₁, while Q₂ - Q₁ was imported into the EU
   
• The implementation of the subsidy lowered firms costs of production, shifting the domestic supply curve from Sd to Sd + subsidy
• Domestic firms increase output and market share from Q₁ → Q₂
• Imports reduce from Q₁Q₃  → Q₂Q₃