Question

1. Explain the cost of "rent seeking" associated with import quota.

Answer 1

ans:The effects of a tariff, which is an excise tax on imported items, are the same as any excise tax: the tariff will raise price, reduce quantity, and decrease the consumers' surplus. A quota is a restriction of imports that also raises price, reduces quantity, and decreases the consumers' surplus. For example, in 1985, the world price of sugar was a bit over three cents a pound, whereas the U.S. price was more than six times the world level. This price differential existed because only 2.677 million tons of foreign sugar were allowed into the U.S. A tariff could produce the same price differential, but unlike a tariff, a quota produces no revenue for the government.

The right to sell sugar in the U.S. has been valuable. One who had that right could buy sugar at the world price and sell it in the U.S. for six times as much. It would seem that import quotas create a windfall gain for the lucky few who have government permission to import. Sometimes they do. But the situation may be more complex.