Question

Explain intuitively why a quota that is competitively auctioned produces a similar outcome as a tariff whose effect reduces imports to the same number of units as the quota.

Distinguish between a VER and a quota with auctioned licenses

Answer 1

Both tariffs and import quotas reduce quantity of imports, raise domestic price of good, decrease welfare of domestic consumers, increase welfare of domestic producers.

Tariff raises revenue for the government, import quota may not. Import quota generates surplus for firms that get the licence to import. For a firm that gets a licence to import, profit per unit equals domestic price (at which imported good is sold) minus world price (at which good is bought) (minus any other costs)

Government may charge fees for import licence. If the government sets the import licence fee equal to difference between domestic price and world price, the import quota works exactly like a tariff. The entire profit of the firm with an import licence is paid to the government. Thus government revenue is the same under such an import quota and a tariff.