Question

“If the amount of quota imposed by a government and the resultant price change are equivalent to the amount of imports and the price change that a specific tariff would have, then the revenue the government collects from the imposition of the quota is the same as the revenue the government would collect if it imposed a specific tariff instead.”

is this true or false?

I'm confused because some information say that government only collect revenue from tariffs but not from quotas. please help me with this question. thank you.

Answer 1

An import quota puts a limit on the amount of imports that can be brought in a particular country. Quota reduces the amount of imports and the prices rise in the market. This happens because a limt on imports, leads to an increase in domestic supply so as to compenste for the demand which could not be met due to reduced imports. As a result of price rise, the producers gain but the government doesn't gain any revenue. The effect of government decision in terms of quota is essentially to reduce the quantity of imports, i.e. quota is a quantity limit. The effect of quota is shown is figure below:

It can be seen from the above figure that as a result of quota, imports fall from Q3 to Q2, domestic supply rises (supply curve moves outwards). Consumers pay a higher price, i.e. P quota and total quantity falls from Q4 to Q3.

Government doesn't make any income as they are not affected directly from quotas.

However, a tariff is the tax on imports, i.e. tariff is a price limit. As a result of tariff, the price of good rises and the quantity of imports fall.Governemnt earns revenue equal to tariff times the quantity of imports. The effects of tariffs is shown in figure below:

As a results of tariff, price rises from Pw to Pi. Consumption falls from OB to OC due to rise in prices. Domestic supply rises from OA to OE. Hence, the imports which were earlier AB now fall to EC.

Government earns (Pw-Pi)*EC as a result of tariff , i.e. tariff times the amount of imports.