Question

The new president of Malawi is looking for ways of increasing the revenue his government collects. At the moment, he is undecided between imposing a specific tariff on imports or a quota whereby the quota licenses will be auctioned in a competitive market.

Given the two options, what choice should he make? Give any two reasons？

Are the two options the president is considering optimal avenues for collecting government revenue?

Answer 1

The new president should choose to impose a specific tariff on imports rather than quotas. This is because -

• Tariffs are taxes levied on the goods that is imported and unlike import quotas there are no limitations on the number of goods that can be imported, as a result of which government can collect more revenue.
• Tariffs are compulsory tax that needs to be paid to the local government, however, quota licenses which are to be auctioned in a competitive market are not. It is a voluntary payment made to the government to benefit from the services that the license provides.

Yes, the two options seems quite practical for the new government to collect revenues. It is considered optimal because tariffs on imports and quotas will protect the infant indutries of the country from harsh international competition and will allow them to grow and develop within the country first. In the same time, imposing tax on imports or auctioning of the quota licenses will only add to the revenue of the government. It is, hence, an optimal avenue because it helps to restore the welfare of its economy by protecting its industries as well as gains revenue from the taxes imposed.