Briefly discuss the similarities and differences of the effects of an import quota and a tariff on domestic price, quantities, and well-being, for a small country producing and selling a product in a competitive world market. (Assume a tariff level that would restrict imports just as much as the quota would.)

Question

What will be an ideal response?

Answer 1

POSSIBLE RESPONSE: Quotas restrict quantity while tariffs effectively raise the price of the good consumers purchase in the domestic market. For a competitive market, the effects of a quota on domestic price, quantities, domestic producer surplus, and domestic consumer surplus  are the same as those of an equivalent tariff. A quota, because it restricts quantity, results in a higher domestic price, lower domestic quantity consumed, and larger domestic quantity produced. As a result, there is a loss of domestic consumer surplus and increase in domestic producer surplus. These are the same as the effects of an equivalent tariff placed on an imported good. Additionally, both a quota and a tariff result in the same deadweight losses that result from domestic production inefficiency and domestic consumption inefficiency. The one effect of a tariff and a quota that is different is related to government revenue. A tariff generates revenue for the importing country's government. Quotas do not necessarily generate revenue for the importing government. The additional price that consumers pay accrues as import markup revenue. While the government could gain this markup revenue as its own revenue if it auctions or sells quota licenses, the markup revenue would instead go to importers if they receive the quota licenses without payment to the government.