Question

Compare and contrast the effects of a tariff in a smaller nation with the effects of a quota, using welfare economics as your analytical approach. Which is the more effective approach if a nation wishes to retain as much value as is possible within its own borders?

Answer 1

Tariffs are the taxes imposed by the government of a country on import and export products while quota is a limitation imposed by the government on the number of goods that can be either imported or exported. Thus, tariffs are taxes and quota is a restriction on the physical quantity of the product.

Tariffs earn revenue for the government and play an important role in increasing GDP of the country while in case of quota no revenue is generated for the government.

The revenue earned from tariff goes to the government while gains obtained from quota are beneficial for the traders. Quotas also encourage corruption and smuggling but tariff does not lead to corruption or smuggling. This is because tariff is applicable to all importers while quotas hurts some allowing other importers thus leading to corruption and smuggling.

tariff is more effective approach if a nation wishes to retain as much value as possible within its own borders because tariff is applicable to all importers while quota is applicable to some importers.