Question

1. What do the welfare effects of an import quota differ from those of import tariff?

Answer 1

As we know that, the import quota is a quantitative restrictions or limit defined by the government on the quantity of imported goods or items produced in the foreign country and sold domestically whereas the import tariff is a tax charged on imported goods. Import tariff results in generating revenue for the country and hence, increase the GDP hence increases national welfare. As opposed to quota, is imposed on the numerical value of goods, not the amount and so it has no such welfare effect.

With the effect of the import tariff on consumers and producers, consumer surplus declines while the producer’s surplus increases. In contrast, import quota results in the fall of consumer surplus only.

Moreover, income generated from the collection of the import tariff is the source of revenue of the government. Conversely, in the case of import quota, traders will get extra income from the collection.

Thus, the key differences between a tariff and a quota is that the welfare loss associated with a quota may be greater because there is no tax revenue earned by a government. Because of this, quotas are less frequently used than tariffs.