The market demand and supply functions for imported cars are: and The legislature is considering a tariff (a tax on imported goods) equal to $2,000 per unit to aid domestic car manufacturers. If the tariff is implemented, calculate the loss in producer surplus. How many units of cars are imported? Suppose that instead of a tariff, importers agree to voluntarily restrict their imports to this level. If they do and no tariff is implemented, calculate producer surplus in this scenario. Do you expect importers will be more in favor of a tariff or a voluntary quota?

First we must determine the market equilibrium quantity and price with the tariff. To do this, we set quantity demanded equal to quantity supplied and solve for the price consumers pay. At a price of $31,478.26, the quantity imported will be: 642,608.7. Producer surplus is If no tariff is implemented, but importers restrict quantity to 642,608.7 units, consumers will pay $31,478.26 per unit. Now importers receive the full amount of the price consumers pay as there is no tariff. This means that with a voluntary quota, producer surplus must be higher than with a tariff. This is shown as follows. New producer surplus with the voluntary quota is: