Compare and contrast the effects of a quota and a tariff on imports. Be sure to include both short-run and long-run effects in your answer.
What will be an ideal response?
A quota is a quantity restriction on imports. Under a quota, profits from the price increase in the importing country usually go into the pockets of the foreign and domestic sellers of the product. This increase in revenue can be used for a variety of reasons, such as paying higher dividends, or to improve productivity. When trade is restricted by a tariff, some of the profits go instead as tax revenue to the government of the importing country. Foreign exporters must accept lower prices for their product.Further, a tariff handicaps all foreign suppliers equally. It still awards sales to the firms and nations who are most efficient and can therefore supply the goods most cheaply. By contrast, a quota necessarily awards its import licenses more or less arbitrarily. There is not the slightest reason to expect the most efficient and least costly suppliers to get import permits. Therefore, in the long run, the population of the importing country is likely to end up with significantly higher prices, poor products, or both.
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