CA Foundation · Business Economics · International Trade
A government fixes the maximum quantity of steel that may be imported in a year at 5 lakh tonnes. Compared with free trade, which of the following is the most likely immediate effect on the domestic market for steel?
The domestic price of steel rises above the world price. An import quota limits the quantity supplied from abroad, so total supply falls, creating scarcity that raises the domestic price and lets domestic producers sell more at the higher price.
- AThe domestic price of steel rises above the world priceCorrect
- BThe domestic price of steel falls below the world price
- CThe domestic price remains the same as the world price
- DDomestic production of steel falls
Explanation
An import quota restricts supply from abroad, so domestic supply is lower than under free trade. Scarcity pushes the domestic price above the world price, and domestic producers expand output. Option B is wrong because a quota reduces supply and does not lower prices.
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