1. Explain why enacting a quota may result in lower total surplus than a tariff, even...

1. Explain why enacting a quota may result in lower total surplus than a tariff, even if they have the same effect on imports and the domestic price.

2. Explain what is meant by factor price equalization. In which model does factor price equalization occur? Why does factor price equalization occur?

Expert Solution

1. Enacting a quota may result in lower total surplus than tariff because it leads to higher prices of the commodities and also reduces the quantity of commodities. Imposing quota means restricting the quantity of imports to the domestic country. This restrictions will result in a lower tax revenue collection by the government from imports and thus, will cause a welfare loss and the total surplus will fall.

2. Factor price equalisation states that as a result of free trade between nations, the price of factors of production will be equal across all trading nations.

Factor price equalisation occurs in Heckscher Ohlin model.
The Heckscher Ohlin model believes that factor price equalisation occurs owing to the assumption that the trading countries have same technological factors for production.

Rahul Sunny answered 2 years ago

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