Question

Rank the following in ascending order of an imposing small country's welfare. If there are any two that are equivalent, briefly explain their equivalencies.

I. a tariff of t in a small country resulting in imports of M units

II. a quota of M units of imports, with the government auctioning quota licenses to the highest bidders

III. a quota of M units of imports in which domestic firms engage in rent-seeking activities

IV. an arrangement in which the exporting country voluntarily agrees to limit its exports to M units

Answer 1

Arranging the above in ascending order we get:

1.  a quota of M units of imports in which domestic firms engage in rent-seeking activities. This leads to low welfare for the small country as corruption leads to fall in the overall welfare because of rent seeking activities.

2. an arrangement in which the exporting country voluntarily agrees to limit its exports to M units.

3. a tariff of t in a small country resulting in imports of M units and  a quota of M units of imports, with the government auctioning quota licenses to the highest bidders. The impact of quota and that of an import tariff are similar.