Question

How do tariffs and quotas differ? Can you think of any reason why foreign producers might prefer a quota rather than a tariff? Explain your answer.

Answer 1

Tariffs and quotas are imposed by government on import and export of goods in order to protect their foreign trade.

Difference between quota and tariff

1. Quota – it is the ceiling on the quantity of the product going to import or export.

Tariff – it is a tax imposed on import and export of goods.

2. Quota- it does not generate any revenue to the government

Tariff- it generates revenue for the government.

3. Quota – it is more restrictive and increases corruption in the economy.

Tariff – it is less restrictive and less vulnerable to corruption.

4. Quota- it reduces consumer’s and producer’s surplus and beneficial to quota holders / importers

Tariff- it reduces consumer’s surplus and increases producer’s surplus and it increases GDP (gross domestic product).

Foreign producers might prefer a quota rather than a tariff: because quota is beneficial for quota holders and it increases production while imposition of tariff reduces imports.