How do you account for quota rents in your cost-benefit analysis of trade policies?

1 What are quota rents?

Quota rents are the difference between the domestic price and the world price of a good multiplied by the quantity of the good that is subject to the quota. For example, if the world price of wheat is $100 per ton and the domestic price is $120 per ton due to a quota that restricts imports to 10,000 tons, then the quota rent per ton is $20 and the total quota rent is $200,000. Quota rents can be seen as a transfer of income from consumers, who pay higher prices, to producers or exporters, who receive higher revenues.

2 How to measure quota rents?

To measure quota rents, you need to know the demand and supply curves of the good in the domestic and world markets, as well as the quota level and the domestic price. You can use a diagram to illustrate the effects of the quota on the market equilibrium and the welfare of different groups. The quota rent is equal to the area of a rectangle with the height of the price difference and the width of the quota quantity. You can also calculate the quota rent algebraically by multiplying the price difference and the quota quantity.

3 How to distribute quota rents?

The distribution of quota rents depends on how the quota is allocated and enforced. There are three main ways to allocate a quota: by auctioning it to the highest bidder, by giving it to domestic producers based on their historical market share, or by giving it to foreign exporters based on their export performance. Each method has different implications for the efficiency and equity of the quota system. Auctioning the quota eliminates the quota rent and maximizes government revenue, but it may reduce the competitiveness of domestic producers. Giving the quota to domestic producers creates a quota rent for them, but it may distort their production and investment decisions. Giving the quota to foreign exporters creates a quota rent for them, but it may reduce their incentive to lower their costs or improve their quality.

4 How to account for quota rents in cost-benefit analysis?

To account for quota rents in cost-benefit analysis, you need to identify who gains and who loses from the quota policy and by how much. You can use the concept of consumer surplus and producer surplus to measure the changes in welfare of different groups. Consumer surplus is the difference between what consumers are willing to pay and what they actually pay for a good. Producer surplus is the difference between what producers receive and what they are willing to accept for a good. Quota rents are part of producer surplus for the quota holders, whether they are domestic producers or foreign exporters. You can use a diagram or a table to show the changes in consumer surplus, producer surplus, and quota rents for each group under the quota policy compared to the free trade scenario. You can then calculate the net benefit or cost of the quota policy by adding up the changes in welfare for each group.

5 How to interpret the results of cost-benefit analysis?

The results of cost-benefit analysis can help you evaluate the efficiency and equity of the quota policy. Efficiency refers to whether the quota policy increases or decreases the total welfare of society, measured by the sum of consumer surplus and producer surplus. Equity refers to whether the quota policy improves or worsens the distribution of welfare among different groups, measured by the changes in consumer surplus, producer surplus, and quota rents. You can use some criteria to interpret the results of cost-benefit analysis, such as the net present value, the benefit-cost ratio, or the internal rate of return. You can also compare the results of different quota allocation methods or alternative trade policies, such as tariffs or subsidies.

6 How to communicate the results of cost-benefit analysis?

The results of cost-benefit analysis can be communicated in various ways, depending on the audience and the purpose of the analysis. You can use graphs, tables, charts, or maps to visualize the effects of the quota policy on different groups and markets. You can use numbers, percentages, or ratios to quantify the changes in welfare and quota rents. You can use words, sentences, or paragraphs to explain the assumptions, methods, and limitations of the analysis. You can use stories, examples, or analogies to illustrate the implications and recommendations of the analysis. You can use headlines, summaries, or key messages to highlight the main findings and conclusions of the analysis.