Question

Rank the following in descending order of Home welfare and justify your answers. If two items are equivalent, indicate this accordingly.

a. Tariff of t in a small country corresponding to the quantity of imports M.

b. Quota with the same imports M in a small country, with quota licenses distributed to Home firms and no rent seeking.

c. Quota of M in a small country with quota license auctioned to Home firms.

d. Quota of M in a small country with the quota given to the exporting firms. e. Quota of M in a small country with quota licenses distributed to rent-seeking Home firms.

Answer 1

a=c because the quota rents are allocated to the government and can be redistributed to consumers.

a=b=c because there is no rent seeking so the entire quota rents are distributed in the domestic country. If there is a non-distortionary tax on firms, the rents can be transferred to consumers.

a=b=c >e because all of the rents are lost during lobbying (bribes to corrupt politicians etc.)

And d=e because the entire quota is given to foreign firms.

So, d=e< a=b=c.