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Problem 4 “An import quota and a tariff have exactly the same effect on price, and...

Problem 4 “An import quota and a tariff have exactly the same effect on price, and bring the same gains and losses, provided that the import quota restricts imports just as much as the tariff.” Indicate one situation in which this statement is true, and another situation in which this statement is false.

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Answer #1

In a situation, when the objective is to protect the domestic industries and it is to be done by restricting the import to the country. In this case, quota and tariff serve the same purpose. In both the case, there will be loss of total welfare in the economy.

Though in a situation, when objective of the government is to earn revenues as tariff revenue, then both the policies are different. Tariff system, will bring tariff revenue to the government, but quota system will not bring the revenue. Here, government will earn revenue with loss to the welfare.

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