Key Idea: The shops are full of imported cheese that costs less than the cheese made at home. The government wants the home dairies to survive, so it has a choice of tools: make the imported cheese more expensive at the border, let in only so many tonnes of it, pay the home dairies to keep going, or ask the foreign seller for so much paperwork that selling here stops being worth it. Those four tools are the topic. Every one of them raises domestic output and cuts imports. What separates them is the price in the shops, and who ends up with the money: the government, an importer holding a licence, or nobody at all. Where you meet it:
Paper 1
- Essays.
- Explain [10]: two forms of trade protection and how each one works.
- Evaluate [15]: the effects on an economy of imposing a tariff. Name every group it touches.
Paper 2
- Data response.
- Define [2]: a tariff. Asked three times in recent papers.
- Explain [4] with a trade diagram: what a tariff does to revenue, to the quantity consumed, or to producer surplus.
The diagram
- One frame, read four ways.
- Domestic demand, domestic supply, a horizontal world price, and that price lifted by the tariff.
- Quotas and subsidies use the same frame, so learning it once covers the whole topic.
🏷️ Tariffs: a tax at the border
A tariff is a tax on imported goods, which raises their price in the domestic market. A specific tariff is a fixed amount per unit, such as 5 per tonne of steel. An ad valorem tariff is a percentage of the import price, such as 20% on imported cars. Either way the world price line inside the country is lifted, and four things move.
| On the tariff diagram | What to draw or read |
|---|---|
| World price | a horizontal line below the domestic crossing. At it the country's own firms supply Q1 and its consumers buy Q4, so imports are Q4 minus Q1 |
| World price plus the tariff | a second horizontal line, higher by exactly the tariff. Both quantities are now read off this line |
| Domestic supply | rises from Q1 to Q2, because the higher price makes domestic output worth producing |
| Domestic consumption | falls from Q4 to Q3, because at the higher price some buyers stop buying |
| Imports | fall from Q4 minus Q1 to Q3 minus Q2. They shrink from both ends at once |
| Government revenue | the rectangle: the tariff per unit × the quantity still imported, Q3 minus Q2 |
| Welfare loss | two triangles, one either side of the revenue rectangle. The left one is domestic firms producing at a higher cost than the world; the right one is the buyers who go without |
Government revenue is the tariff per unit × the quantity still imported after the tariff. That is the gap between domestic demand and domestic supply at the new price, not the whole quantity bought. Using the total quantity is the most common slip on this diagram, and it makes the rectangle several times too wide.
🚫 Quotas: a limit on the quantity
A quota is a physical limit on how much of a good may be imported in a period, such as 200 000 tonnes of sugar a year. Nothing is taxed. Imports simply stop at the limit, so domestic firms supply the rest and the domestic price is bid up.
Tariff: A **tax per unit** at the border. Imports are still allowed, they just cost more.. Imports fall as far as the tax pushes them.. The government collects **tariff revenue**, which it can spend.. The rate is public, so everyone can see how much protection there is..
Quota: A **limit on the quantity**. Once the limit is reached, no more may come in at any price.. Imports are capped, whatever happens to demand.. The government collects **nothing**. The higher price becomes **quota rent** for whoever holds the import licence.. The protection is hidden, because no rate is published..
Important: A quota pushes the domestic price up the way a tariff does, but no tax is charged. On every unit still imported, the gap between the world price and the higher domestic price is quota rent, and it goes to the holder of the import licence, often the foreign seller. So for the importing country a quota costs more than a tariff that cut imports by the same amount: the same higher prices and the same two welfare loss triangles, with the revenue rectangle handed to somebody else.
💰 Subsidies: pay your own producers instead
A production subsidy is a payment from the government to domestic producers, so their costs per unit fall. It protects them without touching the price in the shops, which is what makes it different from the first two tools.
How a production subsidy protects domestic firms
- The government pays per unit — Every unit a domestic firm makes earns it a payment on top of the price. Its cost per unit is effectively lower, so output that was not worth making now is.
- Domestic supply shifts right — The domestic supply curve moves out. At the same world price the country's own firms are now willing to supply more than before.
- Imports fall, the price does not rise — Consumers still pay the world price, and still buy the same quantity. Domestic firms simply supply a bigger share of it, so the imported share shrinks.
- Taxpayers pay for it — The bill is the subsidy per unit × the units domestic firms make. There is still a welfare loss, because higher cost domestic output has replaced cheaper imports.
Pay the producer → costs fall → domestic supply shifts right → imports fall, price unchanged
An export subsidy points the same payment outwards: it pays domestic firms to sell abroad, so their goods undercut producers in the importing country. European support for farmers has been criticised for exactly this, because subsidised food arriving cheaply makes it hard for farmers in poorer countries to sell their own, and the importing country often answers with a tariff. A subsidy is often called the gentlest form of protection, because the price in the shops does not rise. The cost is still real. It is paid in taxes, and that money could have gone to schools or hospitals instead.
📋 Administrative barriers: protection with no price on it
Administrative barriers are rules, standards and procedures that make it harder and more expensive for a foreign firm to sell here. Each one has a respectable reason, which is why they are the hardest kind of protection to argue against.
| Barrier | What the foreign firm has to do | Why imports fall |
|---|---|---|
| Health and safety standards | meet testing rules written for the domestic market, which may differ from its own country's | testing and reformulating cost money, so some firms stop selling here |
| Environmental standards | prove the good was made to domestic environmental rules | goods that cannot prove it are refused entry |
| Labelling and packaging rules | repackage and relabel for this one market | a separate production run for a small market is rarely worth it |
| Customs procedures | fill in long paperwork and wait through inspections | delay is a cost, and fresh goods can spoil in it |
| Government procurement | compete for public contracts under buy domestic rules | the largest single buyer in the country is closed off |
| Voluntary export restraint | agree to limit its own exports, usually under pressure | it works like a quota, applied by the exporting country instead |
An administrative barrier works by making it more expensive and slower for a foreign firm to sell here. Fewer of them think it is worth doing, so imports fall and the domestic price rises. Nobody collects anything. There is no revenue rectangle and no quota rent, only the cost of complying. Barriers like these are now the most common form of protection, because tariffs have been negotiated down over decades and a safety rule is far harder to challenge than a tax rate.
⚖️ Four tools, one comparison
Every tool in this topic raises domestic output and cuts imports. A comparison question is asking about the other two columns: what happens to the price consumers pay, and where the money goes.
| Method | Price to consumers | Who gets the money | Who gains, who pays |
|---|---|---|---|
| Tariff | rises by the tariff | the government, on imported units only | domestic producers and the government gain; consumers and foreign producers pay |
| Quota | rises, because supply is restricted | the licence holder, as quota rent, often the foreign seller | domestic producers and licence holders gain; consumers pay, and the country loses the revenue a tariff would have raised |
| Production subsidy | stays at the world price | the domestic producer, from the government | domestic producers gain, consumers are untouched; taxpayers pay |
| Administrative barrier | rises, because fewer firms sell here | nobody, the cost is the compliance itself | domestic producers gain; consumers pay and no revenue is raised at all |
All four raise domestic output and cut imports. Say that first, then say the price, then name the group that gains and the group that pays. An answer that stops at imports fall has done a third of the job. The price and the money are the other two thirds.
✍️ Worked examples
The four shapes this topic is asked in, with new scenarios. Try each before opening the plan.
A text describes a government adding a charge of 12% to the value of every bicycle brought in from abroad. Define the term tariff.
Model answer plan
See the mark-by-mark plan — for / against / judgement, with marking guidance — in study mode.
Now the diagram question.
A country imports rice at a world price of 40 per sack. It places a tariff of 15 per sack on imported rice. Using a trade diagram, explain the effect of the tariff on the quantity of rice imported and on government revenue.
Model answer plan
See the mark-by-mark plan — for / against / judgement, with marking guidance — in study mode.
Animated graph
Watch the graph build step by step in study mode.
Now the sums.
A country imports tomatoes at a world price of €20 per crate. It then places a tariff of €5 per crate. At €20 domestic producers supplied 30 000 crates and consumers bought 90 000. At €25 domestic producers supply 45 000 crates and consumers buy 80 000. Calculate the change in the amount consumers spend on imported tomatoes.
Model answer plan
See the mark-by-mark plan — for / against / judgement, with marking guidance — in study mode.
And the essay shape.
A government wants to protect its shoe factories from cheaper imported shoes. Explain two forms of trade protection it could use, other than a tariff, and how each one would affect domestic producers.
Model answer plan
See the mark-by-mark plan — for / against / judgement, with marking guidance — in study mode.
✅ Quick self-check
Tap each card to check yourself.
Define a tariff, and name its two forms. A tax on imported goods, which raises their price in the domestic market. A specific tariff is a fixed amount per unit; an ad valorem tariff is a percentage of the import's value.
How do you find government revenue on the tariff diagram? The rectangle: the tariff per unit × the quantity still imported after the tariff, which is the gap between domestic demand and domestic supply at the new price. Using the total quantity is the usual error.
Why do imports fall twice over after a tariff? The higher price makes domestic supply rise and domestic demand fall. Imports are the gap between the two, so it closes from both ends. Imports fall by the sum of the two changes.
A quota and a tariff both raise the domestic price. What is the difference? Where the money goes. A tariff raises government revenue. A quota raises none: the higher price on imported units is quota rent for whoever holds the import licence, often the foreign seller.
Why is a quota more costly for the importing country than an equivalent tariff? Consumers lose the same amount and the same two welfare loss triangles appear, but the rectangle that a tariff would have collected as revenue leaves the country as quota rent instead.
How does a production subsidy protect domestic producers? It lowers their cost per unit, so domestic supply shifts right and they supply more of the market. The consumer price stays at the world price, so consumers are not the ones paying: taxpayers are.
Name four administrative barriers. Health and safety standards, environmental standards, labelling and packaging rules, and slow customs procedures. Buy domestic government contracts count too.
What is a voluntary export restraint? An agreement in which the exporting country limits what it sends, usually under pressure from the importing country. It works like a quota without being called one.
Exam tips
- Government revenue is the tariff × the imported quantity only. Using the total quantity is the most common error on this diagram.
- Label the world price line and the world price plus tariff line separately. Unlabelled lines cannot be read.
- Say both halves of why imports fall: domestic supply rises and domestic demand falls.
- A quota raises no government revenue. Name who gets the difference instead: the holder of the import licence.
- A production subsidy leaves the consumer price at the world price. Do not draw that price rising.
- Name specific administrative barriers. Regulations is too vague, and the mechanism to state is that the foreign producer's costs go up.
- In a longer answer, work through all four groups: consumers, domestic producers, the government and foreign producers. A tariff moves money between them, so say who ends up with it.