Question

Assume that the United States imposes an import quota on Columbian coffee. Relative to the equilibrium world price that would prevail in the absence of import quotas, it is likely that the equilibrium price of coffee in the United States will _____ and the equilibrium price of coffee in Columbia will _____.

Answer 1

increase, decrease

Step-by-step explanation:

Markets generate maximum surplus if all bidders and claimants located to the left of the intersection of supply and demand curves can meet and make transactions. These are the inframarginal bidders and plaintiffs. On the other hand, extramarginal bidders and claimants are located to the right of the market equilibrium on their respective curves. Extramarginal claimants have an availability to pay less than the equilibrium price, and extramarginal bidders have availability to trade at prices greater than those of that balance. The more the management of market mechanisms is diverted, the greater the risk of displacement of infra-marginals by extra-marginals and, with this, the greater the risk of not complying with the quota and skewing the distribution of trade.