Chapter 26: Problem 903

Differentiate tariffs from quotas as barriers to free trade.

Short Answer

Expert verified

In short, tariffs and quotas are both barriers to free trade with distinct characteristics. Tariffs are taxes on imported goods, raising their prices and generating government revenue. Quotas limit the quantity of imported goods, potentially leading to higher prices for domestic consumers without directly generating government revenue. Both tariffs and quotas create a more favorable environment for local industries and can impact domestic production.

Step by step solution

Definition of Tariffs

A tariff is a tax imposed on imported goods and services by a country's government. Tariffs are commonly used as a protectionist measure by governments to save domestic industries from foreign competition and increase revenue. Tariffs raise the price of imported goods, making them relatively more expensive compared to domestically produced goods. #Step 2: Definition of Quotas#

Definition of Quotas

A quota is a restriction on the quantity of a specific good that can be imported or exported over a specified period. Governments use quotas to limit the import of foreign goods, thereby protecting domestic industries from excessive competition. An import quota can be set as an absolute volume limit or a percentage of the total market share. #Step 3: Comparison of Effects on Prices#

Comparison of Effects on Prices

Tariffs and quotas both affect the prices of goods. While tariffs increase the price of imported goods by adding a tax, quotas limit the supply of foreign goods, which can lead to higher prices for domestic consumers due to reduced competition and, in some cases, might generate shortage in supply. #Step 4: Government Revenue#

Government Revenue

A clear difference between tariffs and quotas is the effect on government revenue. Tariffs generate revenue for the government through taxes on imported goods. Quotas, however, do not directly generate any government revenue since no additional charges or taxes are imposed. #Step 5: Impact on Domestic Production#

Impact on Domestic Production

Both tariffs and quotas can impact domestic production. Tariffs can incentivize domestic producers to increase production, as imported goods become more expensive due to the tax. Quotas can have a similar effect on domestic production by creating a protective environment for local industries due to fewer imported products in the market, increasing demand for domestic products. #Step 6: Conclusion#

Conclusion

In summary, the main differences between tariffs and quotas as barriers to free trade are; tariffs are taxes on imported goods, while quotas limit the quantity of imported goods; tariffs raise the price of imported goods, whereas quotas can lead to higher prices for domestic consumers due to reduced supply and competition; tariffs generate government revenue, but quotas do not directly contribute to government revenue. Both tariffs and quotas impact domestic production by creating a more favorable environment for local industries.

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