Export Quotas and Allocative Efficiency under Market Instability

In a stable environment the existence of economic distortions leads to the use of taxes and subsidies rather than of quotas. The purpose of this article is to explore whether the existence of market instability can change that conclusion. In the case of fluctuations originating in domestic supply, export quotas will tend to destabilize domestic consumer prices and, whenever demand elasticities are low, will increase fluctuations in farmers' income. On the other hand, the case of instability originating in foreign markets is more favorable for quotas. In a free trade situation, all the external price instability carries over to the internal market. A quota scheme, on the contrary, stops instability at the country's frontiers. It is when markets are unstable, then, and instability is concentrated in external markets, that we find an argument for quotas. However, it has to be shown that quotas reduce price and income fluctuations in a degree that more than compensates for the reduction of export returns resulting from the introduction of quotas.