Question

Describe one situation in which the government would be better off imposing quantity restrictions than setting a tax and explain why quantity restrictions are better in that case (200 words max).

Answer 1

Quantity restriction is a limit on the quantity of a good or service which can be produced, imported or consumed. Tax is a monetary contribution/fine imposed by government on the production, consumption or import of a good or service. Both of these are done in order to regulate the production or consumption of some particular good or service, but both are used in different cases and has different effects on the producers and consumers.

The government would be better off imposing a quantity restriction rather than a tax for the goods and services for which the price elasticity of demand is inelastic. This is because for these goods when government imposes taxes there is increase in the price of the good but since the demand is inelastic there is no decrease in quantity demanded and hence the main purpose of taxing (i.e. limiting the production or consumption) is not fulfilled and hence a quantity restriction can be more useful in this case.

Quantity restrictions are better in these case because in this case the main motive of the government is to limit the consumption and not just raising funds by taxing, thus quantity restriction can put limit on production, consumption or import but taxing will only raise more funds and increase the price but can't decrease production or consumption.