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Chapter 35: Problem 3

Tariffs and quotas both raise the price of forcign goods to domestic consumers. What is the difference between the effects of a tariff and the effects of a quota on the following? a. The domestic government b. Foreign producers c. Domestic producers

Short Answer

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Answer: Tariffs generate revenue for the domestic government and make foreign goods less competitive, benefiting domestic producers. Quotas do not generate direct revenue for the government but limit foreign competition, benefiting domestic producers. Both tariffs and quotas negatively affect foreign producers by limiting their sales and profits in the importing country. Domestic consumers may also be negatively affected by increased prices and limited choices due to these trade policies.

Step by step solution

01

a. The domestic government

A tariff generates revenue for the domestic government, as it's a tax imposed on imported goods. On the other hand, a quota doesn't generate any direct revenue for the government; it only limits the quantity of imports. However, it may lead to increased demand for domestic goods, which in turn could increase tax revenues for the government indirectly through taxes imposed on those goods.
02

b. Foreign producers

Foreign producers are negatively affected by both tariffs and quotas. A tariff raises the price of their goods in the importing country, making them less competitive with domestic goods. This may lead to decreased sales and profits for foreign producers. A quota directly limits the quantity of goods that foreign producers can sell in the importing country. This can also negatively impact their sales and profits.
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c. Domestic producers

Domestic producers are positively affected by both tariffs and quotas. A tariff raises the price of foreign goods in the domestic market, making domestic goods more competitive and potentially leading to increased sales and profits for domestic producers. A quota limits the quantity of foreign goods entering the market, which can also help domestic producers by reducing competition. However, domestic consumers can be negatively affected by both policies, as they may face higher prices and limited choices.

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Most popular questions from this chapter

Would trade-diversion and trade-creation effects occur if the whole world became a free trade area? Explain.

Suppose the world price of kiwi fruit is \(\$ 25\) per case and the U.S. equilibrium price with no international trade is \(\$ 40\) per case. If the U.S. government had previously banned the import of kiwi fruit but then imposed a tariff of \(\$ 5\) per case and allowed kiwi imports, what would happen to the equilibrium price and quantity of kiwi fruit consumed in the United States?

What is the difference between a customs union and a free trade area?

Think of an industry in your country (if you currently have a job, use that industry). What kind of nontariff barrier could you design that would keep out foreign competitors to the domestic industry? This should be something like a health or safety standard or some other criterion that a government could use as an excuse to protect the domestic industry from foreign competition.

What are the potential benefits and costs of a commercial policy designed to pursue each of the following goals? a. Save domestic jobs b. Create a level playing field c. Increase government revenue d. Provide a strong national defense c. Protect an infant industry f. Stimulate exports of an industry with increasing returns to scale
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