Question

Why is tariff preferred to quota if protectionist polices are unavoidable. Critically evaluate. (30marks)

Urgent!!

Answer 1

Tariff and quota are both measures of protectionist policy. However, there are differences between the two approaches due to which tariff is preffered to quota.

a. With the given import quota, an increase in demand will result in a higher domestic price and greater domestic production than with an equivalent import tariff. On the other hand, with a given import tariff, an increase in demand will leave the domestic price and domestic production unchanged but will result in higher consumption and imports than with an equivalent import quota.

b. A second important difference is that the quota involves the distribution of import licenses. If the government does not auction off these licenses in a competitive market, firms that receive them will reap monopoly profits.

Futhurmore, since import licenses result in monopoly profits, potential importers are likely to devote a great deal of effort to lobbying and bribing government officials to obtain them. Thus, market quotas not only replace the market mechanism but also result in waste from the point of view of the economy as a whole and contain the seeds of corruption.

c. An import quota limits imports to a specified level with certainity, while the trade effect of an import tariff may be uncertain. This is because quantity of imports allowed with import quota is clearly specified.

Also, import quotas are less visible and domestic producers prefer them over import tariff due to this reason.

However, since import quotas are more-restrictive than equivalent import tariffs, society should generally resist these efforts.