Question

What is import quota? Why do some governments use it instead of just using tariff to restrict imports by the same amounts? Is it because quota brings a bigger national gain than tariff?

Answer 1

Import Quota is an example of a trade barrier where the quantity imported of a particular good is restricted. It places a physical limited on the quantity of good that may be imported of a certain period of time, which will restrict foreign imports to the domestic market and increase domestic price ceteris paribus.Its effect is more definitive than a tariff. It refers to government decreed quantitative limits on the total quantity of a product that can be imported into the country during a given time.

Some governments use Import Quota instead of using tariffs because :

• Quotas ensure that imports will not exceed the amount set by the quota. This can be useful if the government wants to assure domestic producers that imports are actually limited.
• Quotas give government officials greater power and discretion over who gets the valuable right to import.
• The government may accede to the desires of of domestic producers who could have monopoly pricing power if import competition is removed at the margin.
• Ex a quota would be more preferred by a domestic monopoly because the monopoly could raise could raise its prices with no fear of growing imports as long as the quota limits quantity imported.

No, a quota is is no better than a tariff, and it may be worse. Quotas tend to cause a bigger fall in economic welfare because the government don’t gain any tax revenue, that you get with tariffs.Quotas lead to higher price for consumers.Quotas may be harder to enforce if it is difficult to count the amount of the good coming into the country.Quotas could be more unfair. It may become a political issue regarding how to distribute Quota. Some firms may do well if they get export quota but others may loose out. There is always an uncertainty regarding how many quotas a firm will get.