Quotas

A quota is a regulation that sets a certain quantity of a good or service to be provided. It can either mandate a minimum production level for firms or impose a cap on the maximum amount that can be produced or imported.

Suppose the government wants to support domestic coffee growers, so it imposes a quota on coffee imports.

With the quota in place, the total supply of imported coffee available in the domestic market is constrained by the quota limit. This creates a new equilibrium with a higher price and lower quantity than in a free market.

Now, consumer surplus for imported coffee is reduced as it is the area under the demand curve but above the higher price level, up to the new lower quantity. The reduction in consumer surplus is the area lost due to the higher price and lower quantity.

Producer surplus for foreign exporters increases for the coffee they sell at higher prices but overall may decrease due to the limited volume allowed under the quota.

Finally, the deadweight loss is represented by the areas formed between the original and the new equilibrium points, indicating the efficiency loss due to the quota. This area represents the lost trades that would have been mutually beneficial.