Which statement best describes the price effect of quotas?

Which statement best describes the price effect of quotas?

• A. Quotas do not affect prices.
• B. Quotas cause prices to fall.
• C. Quotas only affect prices if demand is elastic.
• D. Quotas increase imported prices due to restricted supply.

Answer: (D)

When imports are limited by a quota, the amount of foreign goods that can enter the market is restricted. This tighter supply relative to demand pushes up the price of the imported goods, and that higher import price tends to lift the overall price in the market. Elasticity of demand doesn’t determine the direction of the price move—the cap on quantity itself causes prices to rise. So the statement that best describes the price effect is that quotas raise imported prices due to restricted supply.

When imports are limited by a quota, the amount of foreign goods that can enter the market is restricted. This tighter supply relative to demand pushes up the price of the imported goods, and that higher import price tends to lift the overall price in the market. Elasticity of demand doesn’t determine the direction of the price move—the cap on quantity itself causes prices to rise. So the statement that best describes the price effect is that quotas raise imported prices due to restricted supply.