Question

Explain why a quota used to protect a domestic monopolist from international competition will result in higher deadweight losses than a tariff imposed on the same amount of imports.

Answer 1

According to Eastwoods, deadweight cost is the same on both the quota imposition and the tariff imposition.

Tariff protecting a domestic monopolist causes the monopolist to act as a perfect competitor against import competition. The deadweight losses of the tariff is same as quota in perfectly competitively industry.

In case of quota, the curve of effective demand facing the monopolist is its monopoly demand minus the quote denotes a foreign supply under the tariff. This represents a parallel leftward shift, with the horizontal distance equal to the quota.The monopolist retains an ability to influence the domestic price,which will be higher than it is in the tariff case, and deadweight losses increase above those with a tariff.

If the quota is equal to imports with the tariff, then the production and consumption deadweight losses are the same However, it is possible for exporters to collect some or all of the revenue collected by the government with the tariff. If that occurs, total losses to the quota­ imposing country will exceed those incurred with the tariff.