Question

Suppose that instead of tariff, a quota is imposed, explain the disadvantages in terms of government revenue, and consumer welfare.

Answer 1

A tariff is a tax on imports. It is normally imposed by the government on the imports of a particular commodity. On the other hand, quota is a quantity limit. It restricts imports of commodities physically. It speci­fies the maximum amount that can be imported during a given time period.

Disadvantage of quota's::

(i) Corruption:

Quotas generate no revenue for the government. However, if the government auctions the right to import under a quota to the highest bidder only then quotas are simi­lar to tariff. But quotas lead to corruption. Usually, officials charged with the allocation of import licences are likely to be exposed to bribery. Under this situation, tariff is prefer­able to quotas.

(ii) Monopoly Profit:

Quotas cre­ates a monopoly profit for those with import licences. This means that consumer surplus is converted into monopoly profits. Thus, quo­tas are likely to lead to a greater loss of con­sumer welfare. If a tariff is imposed domestic price will be equal to import price plus tariff.