A. Distinguish between a tariff and a quota
b. In what ways are tariffs and quotas similar?
c. In what ways are tariffs and quotas different?
d. Why might a foreign producer prefer a quota rather than a tariff?
a. A tariff is a tax imposed by a government on imports while a quota is a numerical limit imposed by the government on the quantity of a good that can be imported into a country.
b. Compared to unrestricted trade, both a tariff and a quota result in: (1 ) a higher domestic price for the protected good; (2 a lower quantity consumed; (3 ) a decrease in consumer surplus; (4 ) an increase in producer surplus; (5 ) an inefficient allocation of resources (a deadweight loss).
c. One important difference between a tariff and a quota is that a tariff generates revenue for the government. Part of the decrease in consumer surplus is redistributed to the government in the form of tariff revenue. A quota generates no revenue for the government. Part of the decrease in consumer surplus is redistributed to the foreign producers who are allowed to sell the good in the domestic market.
d. A foreign producer might prefer a quota to a tariff because the producer is able to sell the product at a higher price and also to capture part of the decrease in consumer surplus.
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