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Chapter 5: Problem 2

How does the revenue effect of an import quota differ from that of a tariff?

Short Answer

Expert verified
An import quota and a tariff both restrict the quantity of goods imported, but only a tariff generates revenue for the government, as it involves a tax on imports. An import quota doesn't provide any government revenue, as it only puts a limit on the quantity of imports with no tax collection.

Step by step solution

01

Understand an Import Quota

An import quota is a restriction set by a government that limits the number of units of a particular product that can be imported in a given period. It does not provide any revenue for the government because no tax is levied on imports under quota. The allocation of import licenses determines who profits from the quota.
02

Understand a Tariff

On the other hand, a tariff is a tax imposed on imported goods and services. Tariffs increase the price of imported goods and thus effectually restrict imports, but unlike quotas, they generate revenues for the government.
03

Compare the Revenue Effects

So, the revenue effect from an import quota is zero, as it doesn't involve any tax, whereas a tariff creates revenue for the government by imposing a tax on imported goods and services

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Most popular questions from this chapter

What are the major forms of subsidies that governments grant to domestic producers?

Which is a more restrictive trade barrier-an import tariff or an equivalent import quota? 7\. Differentiate among sporadic, persistent, and predatory dumping.

In the past two decades, nontariff trade barriers have gained in importance as protectionist devices. What are the major nontariff trade barriers?

Rather than generating tax revenue as do tariffs, subsidies require tax revenue. Therefore, they are not an effective protective device for the home economy. Do you agree?

Why is a tariff-rate quota viewed as a compromise between the interests of the domestic consumer and those of the domestic producer? How does the revenue effect of a tariff-rate quota differ from that of an import tariff?
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