Canada’s Policies on Domestic Personal Protective Equipment

Subject: Economics
Pages: 2
Words: 303
Reading time:
2 min

There are three possible ways to achieve higher productivity in comparison with free trade equilibrium in a small importing economy. The methods include imposing import tariffs, import quotas, and voluntary export restrictions (VERs).

As for the ranking, it is preferable to use import tariffs, then import quotas, and then VERs. In all three cases, the changes will be as shown in the graph below.

Graphs of three ways to achieve higher productivity.

As a result of all three policies, the price will increase from P to P’, which will cause the quantity of produced PPE to increase from Q1 to Q3, which is below the autarky price of Q2.

Import tariffs are the preferable option, as the net decrease in the country’s welfare will be the lowest. In the case of the import tariffs, the consumer surplus will increase by area a, while the producer surplus will decrease by area b+c+d. However, the government will make a profit from area c, which implies that the total welfare change will be –(b+a).

VERs are the least preferable option, as the net welfare change will be – (b+c+d), as area c will be attributed to foreigners, and the change in government revenues will be zero.

The import quotas are the middle option, as area c will be attributed to quota rents. These rents will be distributed depending on the efficiency of the auction. In the best-case scenario, the impact of the quota will be similar to the tariffs (net welfare decrease by b+d), while in the worst-case scenario, the changes can be similar to VERs (net welfare decrease by b+c+d). In the majority of cases, net welfare decrease will be between these two options.